line of confectionery. This new line will not incur additional fixed costs, but variable costs will be approximately 30% of sales revenue. There is a 60% probability that demand will be high in the first year. If so, sales revenue is expected to be $800 000 but only $100 000 if demand is low. With high demand, the company will continue operations for another two years. If demand is high in the first year the company estimates a 50% probability of sustained high demand in which case they are expected to earn cash inflows of $750 000 each for years 2 and 3. There is a 50% probability of reduced demand following high demand in year 1. In this case, the company will earn inflows of $350 000 in years 2 and 3.

The company does not expect to continue production after year 1 if demand is low.

Liquidation costs and inflows from project termination are expected to be as follows:

Costs Cash Inflows

Year 1 $100 000 $400 000

Year 3 $150 000 $250 000

The cost of capital is 15%

Required: Using NPV analysis determine whether the project should be adopted.