Your firm is evaluating a new $725,000 investment opportunity with a 16% required return. You expect to sell 3,500 units per year at $50 net cash flow each for the next 8 years. Suppose that after one year, you will know more about demand and be able to revise your estimate of future unit sales based on sales you observe for year 1. Further, suppose that the project can be dismantled and sold to net $650,000 at that time.

a. What is the minimum level of unit sales for year 1 below which would it make sense to abandon the project?

b. If the original expectation of 3,500 unit sales is the average of two equally likely outcomes (3,000 units or 4,000 units), what is the value of the project, including the option to abandon at the end of the first year?