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You have been hired to perform a feasibility study on a new accounting software that requires an initial investment of $9 million. This project will last 8 years. The company expects a total of $2 million in free cash flow in the first year. After one year the remaining annual free cash flows will be revised either upward to $3 million or downward to $500,000. Each revision has an equal probability of occurring. At that time (i.e. one year from now), the project can be abandoned and sold off for $4.8 million after tax. If the project is not liquidated the cash flow will continue for 7 more years, starting at year 2.
The relevant discount rate is 10 percent. What is the NPV of the project?
a. $1638753
b. $2062998
c. $939324
d. $1993003
e. $1155113
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