You are the CEO of your company. The Research and Development Department of your company has made a significant progress in a new technology. You are considering a pilot program using this technology to produce a brand-new product. This pilot program will last for one year and cost 500 million. You believe the pilot program has a 50% chance to succeed and 50% chance to fail. If it succeeds, you will invest 3000 million in Year 1 to build up a complete product line, which will generate free cash flows of 400 million in perpetuity beginning in Year 2. If it fails, you can still build the product line but the expected free cash flows will only be 200 million in perpetuity beginning in Year 2. Alternatively, you do not build the complete product line but sell the technology for 300 million, i.e. giving up the product. The cost of capital is 10%.

Required:

(a)You understand that the pilot program is in fact a real option in this project. Please calculate the value of this real option under the conditions in Part i. (b )You also consider a plan alternative to that in Part i. In particular, you skip the pilot program and build up the complete product line directly at a cost of 3000 million. Assume that with a 50% chance it will generate free cash flows of 400 million in perpetuity beginning in Year 1 and with a 50% chance it will generate free cash flows of 200 million in perpetuity beginning in Year 1. The cost of capital is 10%. Please calculate the NPV assuming the pilot program is skipped.