QUESTION 1 Paper Planes Aviation Inc. manufactures small, private aircraft. Management is evaluating a proposal to introduce a new high performance plane. High performance aviation is an expensive sport undertaken largely by people who are both young and wealthy. Paper Planes sees its target market as affluent professionals under 35 who have made a lot of money in the stock market in recent years. Stock prices have been rising rapidly for some time, so investment profits have been very handsome, but lately there are serious concerns about a market downturn. If the market remains strong, Paper Planes estimates it will sell 50 of the new planes a year for five years, each of which will result in a net cash flow contribution of $200,000. If the market turns down, however, only about 20 units a year will be sold. Economists think there's about a 40% chance the market will turn down in the near future. There are also some concerns about the design of the new plane. Not everyone is convinced it will perform as well as the engineering department thinks. Indeed, the engineers have sometimes been too optimistic about their projects in the past. If performance is below the engineering estimate, word-of-mouth communication among fliers will erode the product's reputation, and unit sales after the first year, will be 50% of the forecasts above. Management thinks there's a 30% chance the plane won't perform as well as the engineers think it will. The cost to bring the plane through design and into production is estimated at $15M. Paper Planes's cost of capital is 14%. a. If Paper Planes elects to do the project, what is an abandonment option at the end of year 1 worth if Paper Planes can recover $8 million of the initial investment into other uses at that time? Enter your answer in millions and don't include the "$" or commas. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round the answer to two decimal places. If an answer is zero, enter "O". Do not round intermediate calculations. Round PVF and PVFA values in intermediate calculations to four decimal places. $ million b. If the recovery is $13 million? Enter your answer in millions and don't include the "$" or commas. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round the answer to two decimal places. Do not round intermediate calculations. Round PVF and PVFA values in intermediate calculations to four decimal places. $ million QUESTION 1 Paper Planes Aviation Inc. manufactures small, private aircraft. Management is evaluating a proposal to introduce a new high performance plane. High performance aviation is an expensive sport undertaken largely by people who are both young and wealthy. Paper Planes sees its target market as affluent professionals under 35 who have made a lot of money in the stock market in recent years. Stock prices have been rising rapidly for some time, so investment profits have been very handsome, but lately there are serious concerns about a market downturn. If the market remains strong, Paper Planes estimates it will sell 50 of the new planes a year for five years, each of which will result in a net cash flow contribution of $200,000. If the market turns down, however, only about 20 units a year will be sold. Economists think there's about a 40% chance the market will turn down in the near future. There are also some concerns about the design of the new plane. Not everyone is convinced it will perform as well as the engineering department thinks. Indeed, the engineers have sometimes been too optimistic about their projects in the past. If performance is below the engineering estimate, word-of-mouth communication among fliers will erode the product's reputation, and unit sales after the first year, will be 50% of the forecasts above. Management thinks there's a 30% chance the plane won't perform as well as the engineers think it will. The cost to bring the plane through design and into production is estimated at $15M. Paper Planes's cost of capital is 14%. a. If Paper Planes elects to do the project, what is an abandonment option at the end of year 1 worth if Paper Planes can recover $8 million of the initial investment into other uses at that time? Enter your answer in millions and don't include the "$" or commas. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round the answer to two decimal places. If an answer is zero, enter "O". Do not round intermediate calculations. Round PVF and PVFA values in intermediate calculations to four decimal places. $ million b. If the recovery is $13 million? Enter your answer in millions and don't include the "$" or commas. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round the answer to two decimal places. Do not round intermediate calculations. Round PVF and PVFA values in intermediate calculations to four decimal places. $ million