Nike has developed a prototype for a Nike-branded baseball that the firm plans to market to Major League baseball, college baseball, and high school baseball. They hope that the baseball is accepted as the new standard for most leagues, but the balls rate of market adoption is uncertain. In order to have the ball ready in 1 year, Nike would have to invest $50 million to set up contractual relationships with third-party contract manufacturers in China. The balls average total cost would be $0.50 and the selling price would be $1.50. Based on market surveys, Nike believes that there is a 25% chance of a high rate of adoption, in which 100 million balls will be sold annually forever, and a 75% chance of a low rate of adoption, in which 10 million balls will be sold annually forever. The adoption rate will be determined in one year when the first orders for the balls come in. The annual fixed costs associated with the project would be $30 million per year. Ignore tax effects and assume that Nikes cost of capital is at 10% and the risk-free rate is 5%.

a) What is the NPV of the project based on the projects expected future cash flows? Based on this measure, should Nike accept the project? b) What is the embedded option in this project? Is the project worthwhile when considering the option?