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Problem 10-28 Abandonment Option [LO4) Hit or Miss Sports is introducing a new product this year. If its seeatnight soccer balls are a hit, the rm expects to be able to sell 59,1 00 units a year at a price of $58 each. If the new product is a bust, only 23,800 units can be sold at a price of $44. The variable cost of each ball is $25 and xed costs are zero. The cost of the manufactun'ng equipment is $6 million, and the project life is estimated at 11 years. The rm will use straight-line depreciation over the 11year life of the project. The rm's tax rate is 35% and the discount rate is 14%. a. Ifeach outcome is equally likely, what is the expected NPV? [Round your answer to the nearest dollar.) ~w $: Will the rm accept the project? The rm will the project. b. Suppose now that the rm can abandon the project and sell off the manufacturing equipment for $5.5 million if demand for the balls turns out to be weak. The rm will make the decision to continue or abandon after the rst year of sales. Does the option to abandon change the nn's decision to accept the project? NW $l:l If the company has option to abandon, the project should be . References