EXTRA PRACTICE PROBLEMS, REAL OPTIONS 1. Engineers R Us is considering introducing a new machine for sale. They think they can sell either 15 units per year for each of the next five years or 5 units per year for each of the next five years. Each outcome is equally likely. They project $500,000 per unit sold in net cash flow (which includes the effects of depreciation and taxes). The cost to build the factory for making the machines is known to be $18 million and after five years it would have a salvage value (net of tax) of $3 million. The discount rate that Engineers R Us uses for capital budgeting is 17%. a) Decide as of today whether you would do the project and state why or why not. (5 points) b) Now you are told that after the first year goes by and just after the first years cash flow comes in, you will be able to abandon the project such that you receive at that time an after-tax salvage value of $11 million but no further cash flows from operations. Given this new information, decide as of today whether you would go ahead with the project and state why or why not. (12 points)