Problem $7-18$ Abandonment

We are examining a new project. We expect to sell $6,800$ units per year at $$62$ net cash

flow apiece for the next $10$ years. In other words, the annual operating cash flow is

projected to be $$626,800=$$$421,600.$ The relevant discount rate is $16$ percent, and

the initial investment required is $$1,790,000.$ After the first year, the project can be

dismantled and sold for $$1,660,000.$ Suppose you think it is litely that expected sales will

be revised upward to $9,800$ units if the first year is a success and revised downward to

$5,400$ 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. $($Do not round intermediate calculations

and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ What is the value of the option to abandon? $($Do not round intermediate calculations

and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

Answer is complete but not entirely correct.