Consider a 2-phase project that requires an initial cash outlay of $15 million today for R&D

over the next two years, during which there is no cash flow incurred.The company will then spend $345 million to put the productive capabilities in place at the end of the R&D periodIf the R&D phase proves successful, which is expected to have a probability of 0.70, the expected cash flows will be $130 million annually over the 4-year production phase.The annual discount rate is 12%, compounded monthly.If the R&D phase is unsuccessful, the company is given an option to upgrade the project by building a better production facility at a cost of $450 million (in lieu of the $345 million facility) at the end of the R&D phase instead.The upgrade production facility is expected to generate a cash flow of $120 million in the first year of production, and the cash flows grow at 10% annually throughout the production phase.

(a)Calculate the NPV of the project embedded with the real option.

(b)Use your answer for part (a) to calculate the value of the option to upgrade given that the base project's NPV (i.e., without the real option) is -$8.45 million.

Question attached above. Please show all the work necessary for the problem along with calculations rounded to 4 decimal points. THank you!