1. The Masterson, Inc. is considering the purchase of a piece of equipment whose upfront cost is $65 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 $15 million in year one and that EBIT grows at 3.42% per year for nine more years; or it could be a poor performer and produce only $5 million in EBIT in year one and that will grow by only 2.12% per year over the remaining useful life of ten years. The machine will be depreciated on a straight line basis over its useful life down to a book value of $9 million. The expected salvage value of the machine at the end of year ten is $11 million. The company's marginal tax rate is 25% and its RRR or WACC is 16%. The company assigns a 38% chance to success.
2. Given the above information and based on static analysis, should the company go ahead with its investment?
3. 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 $61 million. Given this information, should the company go ahead with the investment?
4. What is the present value of the option to abandon?

This last problem is not an imitation problem. You should spend a little bit of extra time thinking about how to solve it and the best way to present the solution to the reader.

Please show all calculations clearly and draw decision trees where necessary.