Nike is considering a new line of sports bags that employs a new type of fabric using a cutting edge technology. The product line initially costs $530 million and the discount rate is 20%. If the sports bag line is successful, it generates a perpetual cash flow of $150 million each year, and if not, the perpetual cash flow would be $50 million per year. The probability of success and failure is equally likely.

The management also notices that the expertise gained from developing this line of sports bag can be used to develop an entire new line of winter clothes. The additional development cost is $120 million. The present value of future cash flows from the related winter clothes line is $200 million if the sports bag line turns out to be successful, and is $20 million if the sports bag line is unsuccessful. The management should

1. Terminate the sports bag line: because it has a NPV of -$30 million

2. Develop the sports bag line; because it has a NPV of $70 million

3. Develop the sports bag line: because it has a NPV of $10 million

4. Terminate the sports bag line; because it has a NPV of -540 million

5. Develop the sports bag line: because it has a NPV of $80 million