Parvati wants to undertake a project that costs $10,000 and shall generate CFs of $1500 each year for the next 9 years. If the cost of capital is 7% find the NPV. Parvati wants to incorporate an option to abandon and commissions a study to estimate future Cash Flows. She finds that from year 2 the CFs can go up to $2000 each year for the remaining years of the project with a probability of 7/10 or go down to $1100 for the remaining project years. Parvati can also abandon the project and sell it for scrap for $1000. What is the new NPV assuming that the cost of capital increases to 9%?

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C G M N 1 Cost of Project Number of Years a Cost of Capital 4 CF each Year & Option 1 NPV 9 Option 2 10 CF if revised upward 12 CF if Revised downward 12 Number of years left 12 PV of upward revision of CF 14 PV of down ward revision of CF 15 Scrap value 16 CF at date 1 = PV of Expected Future CF's + CF at Date 1 17 PV of CF at date 0 18 NPV at Date 0 for option 2 19 ACCEPT or REJECT the Project 20 21 22