Value of the option to abandon

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We are examining a new project. We expect to sell 5,000 units per year at $64 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $64 × 5,000 = $320,000. The relevant discount rate is 13 percent, and the initial investment required is $1,610,000. After the first year, the project can be dismantled and sold for $1,210,000. Suppose you think it is likely that expected sales will be revised upward to 8,000 units if the first year is a success and revised downward to 3,600 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., 32.16.)

NPV $

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., 32.16.)

Option value $

Reference no: EM131938612

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