1. The Masterson, Inc. is considering the purchase of a piece of equipment whose upfront cost is $168 million. The company estimates that the result of operating this equipment could go one of two ways: it could be highly successful and produce EBIT of $38 million in year one and that EBIT grows at 4.10% per year for nine more years; or it could be a poor performer and produce only $11 million in EBIT in year one and that will grow by only 2.60% per year over the remaining useful life of ten years. The machine will be depreciated on a straight-line basis over the project life down to a book value of $24 million. The expected salvage value of the machine at the end of year ten is $29 million. The companys marginal tax rate is 25% and its RRR or WACC is 16%. The company assigns a 38% chance to success.
   1. Given the above information and based on static analysis, should the company go ahead with its investment?
   2. Upon further study the company realizes that, if the project proved to be underperforming by the end of year one, the company can stop production and sell the machine for a salvage value of $162 million. Given this information, should the company go ahead with the investment?
   3. What is the present value of the option to abandon?