You have the opportunity to purchase a facility that manufactures laptops. If you purchase this facility, you expect to sell 100,000 laptops per year for the next 10 years. The profit per laptop is $300, and the annual fixed cost of operating the facility is $20M. After 10 years, there is a 50% probability that you will sell 50,000 laptops per years in perpetuity, and a 50% probability that you will sell 150,000 laptops per year in perpetuity. The profit per laptop and annual fixed cost of operating the facility always remain the same. The purchase price of the facility is $100M. Assume a discount rate of 8%.

a) What is the NPV of the facility?

Assume that in exactly ten years (t=10), you learn whether you will sell 50,000 or 150,000 laptops per year in perpetuity (from t=11 onward). You now have the option to abandon the facility at t=10 after learning how many laptops you will sell going forward. Abandoning the facility means that you get a payoff of zero.

b) Show why you will choose at t=10 to abandon the facility if you learn that you will sell 50,000 laptops per year going forward. Also show why you will choose at t=10 to continue operating the facility if you learn that you will sell 150,000 laptops per year going forward.

c) From the perspective of t=0, calculate the NPV of the facility under the assumptions that you will abandon the facility at t=10 if you learn at t=10 that you will sell 50,000 laptops per year from t=11 onward, and that you will choose at t=10 to continue operating the facility if you learn at t=10 that you will sell 150,000 laptops per year from t=11 onward.