In the previous problem, supposed the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if the project is a success. This implies that if the project is a success, projected sales after expansion will be 17,600. Again, assuming that success and failure are equally likely, what is the NPV of the project? Note that abandonment is still an option if the project is a failure. What is the value of the option to expand?

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.