Q1. A firm owns a patent on a new lighting technology and is deciding whether to begin utilizing it in its existing products.One year from now, the company will know if the market has accepted the new technology.

If the technology is accepted, it will generate cash flows of $40 million in one year.If the technology is not accepted, it will generate cash flows of $28 million in one year.

The value of the technology today under these assumptions is $35 million and the risk-free rate is 6%.Suppose that in one year, if the technology is not accepted, the company can sell the patent for $32 million.

Use the binomial model to find the present value of the option to abandon the technology (i.e., to sell the patent).

Do not round intermediate values and submit your final answer rounded to the nearest cent

Q2. An all-equity firm is pursuing a $2.9 million investment in a depreciable asset.The asset will be depreciated using the straight-line method over its 5 year life.The investment is expected to generate earnings before taxes and depreciation of $990,000 per year for five years.

The firm can obtain a five-year, non-amortizing loan at a rate of 10.4 percent to fully finance the project.The entire principal of the loan will be repaid in a balloon payment at the end of the fifth year while interest payments on the loan will be made at the end of each year.The firm's cost of unlevered equity is 12 percent andit faces a tax rate of 27 percent.Use the APV method to value the investment.

Do not round intermediate values and enter your final answer rounded to the nearest cent