Tugboat operators Grady and Sons expect an increased demand for safety training in maritime industry due to new impending licensing requirements by the Coast Guard. They contemplate investing in a small fleet of special safety training tugs. Due to several uncertainties associated with the project, Grady 's analysis includes options to abandon the project at 2 different stages, as well as different levels of future demand.

Grady would have to invest $120,000 at t=0 for the design and model testing of the training tugs, as well as costs associated with getting an Instructors' license from the Coast Guard. Grady 's management believe that there's 80% probability of success of this stage. If Stage 1 is not successful, the project will be abandoned with 0 salvage value.

The next stage, if undertaken, would consist of building the first tugboat (a prototype) for $800,000 at t=1. If they are satisfied with the prototype and it passes the Coast Guard inspection, they are going to build two additional tugboats for $1,000,000 at t=2. The probability of the prototype success is 60%. If not, they estimate that they can sell the prototype for $200,000 at t=2.

If the two additional tugboats are built, they estimate that the NPV of their training line of business will be $8,000,000 in the best case and $4,000,000 in the worst case scenario. The probability of the best case is 25%, while the probability of the worst case is 75%. Grady 's WACC is 10%. What is the expected NPV of the project?