Nippon Inc is considering a project that has an up-front cost of $500,000. The projects subsequent cash flows depend on whether its products become the industry standard. There is a 60% chance that products will become the industry standard, in which case the projects expected cash flows will be $120,000 per year for the next 7 years. There is a 40% chance that products will not become the industry standard, in which case the projects expected cash flows will be $60,000 a year for the next 7 years. Assume the cost of capital is 8%.

a.) Calculate NPV of the project.

b.) Assume that 3 years from now, Nippon will know if its product will have become the industry standard. The firm has the option to abandon the project after receiving the cash flows at t = 3, and the abandonment option does not affect the cost of capital. If the firm decides to abandon the project, it will receive additional $350,000 at t = 3, but will no longer receive any cash flows after that. What is the estimated value of the abandonment option?

ans for part a is -188.47 and part b is:25,242