In the previous problem, suppose you think it is likely that expected sales will be revised upwards to 9500 units if the first year is a success and revised downwards to 4300 units if the first year is not a success.

a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering.

b. What is the value of the option to abandon?

Data from previous question

We are examining a new project. We expect to sell 8,750 units per year at $189 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $189 × 8,750 = $1,653,750. The relevant discount rate is 14 percent, and the initial investment required is $5,500,000.