You are given the following information on the best guess of related outcomes for a project.

The initial cash outlay for developing and market testing the product over the year IS $$60M.$

Following the test, the company will spend another $$420M$ to put the productive capabilities

in place at the END of the year. If the test is successful, which is expected to have a

probability of $0\mathrm{.}75,$ the expected cash flows will be $$140M$ for the first year of production

and will grow at an annual rate of $10\%$ for the remaining four years of production. If the

test fails, the expected annual cash flows will be $$65M$ for the $5-$year production phase. The

discount rate is $14\%.$

$($a$)$ Calculate the NPV of the project at time $0$ assuming that the project will be

implemented regardless of the outcome of the test. Given that the value at the END

of the testing year of the $5-$year $$65$M annuity is $$223\mathrm{.}15M.$

$($b$)$ Say, you are given the option to upgrade by building a better production facility at a

cost of $$490M$ if the test fails. The upgraded facility is expected to generate annual

cash flows of $$90M$ for five years. Note that the base facility and cash flows

estimates will apply if the test is successful. Calculate the value of the project at

time $0$ assuming that it includes the option to upgrade.

$$$$0\mathrm{.}59M$;dots$>$You are given the following information on the best guess of related outcomes for a project. The initial cash outlay for developing and market testing the product over the next year IS $$70$M$.$ Following the test, the company will spend another $$400$M to put the productive capabilities in place at the END of the year. If the test is successful, which is expected to have a probability of $0\mathrm{.}8,$ the expected annual cash flows will be $$150$M for five years. If the test fails, the expected annual cash flows will be $$50$M for five years. The discount rate is $12\%.($a$)$ Compute the NPV of this project at time $0$ assuming that the project will be implemented regardless of the outcome of the test. Given that the value at the END of the testing year of the $5-$year $$150$M annuity is $$540\mathrm{.}72$M$,$ and that of the $5-$year $$50$M annuity is $$180\mathrm{.}24$M$.($ b$)$ Say, you are given the option to upgrade by building a better production facility at a cost of $$500$M if the test fails. The upgraded facility is expected to generate annual cash flows of $$100$M for five years. Note that the base facility and cash flows estimates will apply if the test is successful. Compute the value of the option to upgrade at time $0.$