Phord is considering entering the self driving car market with their T1 model car.

Forecasts show that the T1 has a negative NPV of $36.52 million. The T1's cash flows are shown in the table below. It can't meet the 18% hurdle rate.

The T1 gives not only its own cash flows, but also a call option to go on with version T2 of the self-driving car.

Assume:

1.) The decision to invest in the T2 must be made after 4 years, in 2019.

2.) The investment required for T2 is $990 million

3.) The present value of cash inflows for version T2 is $670 million (amount theyll get in the future)

4.) The future value of version T2's cash flows is highly uncertain, with a standard deviation of 40% per year.

Cash flows for Model T1 (in millions)
	2015	2016	2017	2018	2019	2020
After tax cash flows	-150	120	140	300	700	0
Required Capital Investment	-400	0	0	0	0	0
Increase in Working Capital	-350	-80	-50	100	150	175
Net cash flows	-900	40	90	400	850	175
NPV @ 18% = -$36.52 million

QUESTION:

Calculate:

a) the value of the option to invest in version T2 of the self-driving car; and

b) the strategic (expanded) NPV of the T1.