Zefram Industries has developed a new product called the SX-450 which they hope to bring to market shortly, although all the bugs have not been worked out yet. When initiated, the project is expected to cost $15 million up front in production assets (invested in CCA class 8 assets, which depreciate 20% of their remaining value each year). Regardless of when it is launched, the product is expected to have a market life of 5 years after which the project will be shut down. It is expected that the assets involved can be sold off for $4 million at that time as well (though class 8 will remain open for Zefram). A working capital investment of $800,000 will have to be made when the project is initiated but will be fully recoverable during close up. For each of the five years it remains on the market, sales of the SX-450 should add $4.5 million in after-tax profits to Zefram's bottom line.

The only complication facing the project is that the SX-450's "bugs" might force an expensive recall (incurring a pre-tax cost of $15 million) one year after sales begin, and damaging the product's reputation enough to prevent any sales in the remaining 4 years of the product's expected life. In the event that a recall is forced, the working capital would be recovered at the same time as the recall is initiated and production assets could be salvaged for $10 million.

If the project is initiated today, the probability of a recall the following year is 10%. If the project is delayed by 1 year so that bugs can be worked out (at a negligible direct cost), the probability of a recall falls to 1%. If the project is delayed by another year, its reliability can be even further improved and the probability of a recall falls to 0.1%. Zefram pays a 35% corporate tax rate and feels that a 13% discount rate is appropriate for the SX-450 project.

Assuming the firm's analysts have correctly predicted the probabilities and outcomes, at which point in time should they begin production of the SX-450? Justify your answer with regards to the project's NPV.