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2. We are examining a new project. Suppose we think it is likely that expected sales will be either 9,500 units if the project is a success or revised downward to 3,000 units if the project is not a success. We expect to $63 net cash flow apiece for the next 10 years. The relevant discount rate is 14 percent, and the initial investment required is $1,600,000. At the end of the first year, the project can be dismantled and sold for $1,200,000.

A.If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering.

B.What is the value of the option to abandon?

Continue with problem 2, suppose the scale of the project can be expanded in one year into three projects if it turns out to be a success. Again assuming that success and failure are equally likely,

A. what is the NPV of the project? Note that abandonment is still an option if the project is a failure.

B.What is the value of the option to expand?