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

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We are examining a new project. We expect to sell 6,800 unitsper year at $62 net cash flow apiece for the next 10 years. Inother words, the annual operating cash flow is projected to be $62× 6,800 = $421,600. The relevant discount rate is 16 percent, andthe initial investment required is $1,790,000. After the firstyear, the project can be dismantled and sold for $1,660,000.Suppose you think it is likely that expected sales will be revisedupward to 9,800 units if the first year is a success and reviseddownward to 5,400 units if the first year is not a success. Supposethe scale of the project can be doubled in one year in the sensethat twice as many units can be produced and sold. Naturally,expansion would be desirable only if the project were a success.This implies that if the project is a success, projected salesafter expansion will be 19,600. Note that abandonment is an optionif the project is a failure.
a. If success and failure are equally likely, what is the NPV ofthe project?
b. What is the value of the option to expand?

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We are examining a new project. We expect to sell 6,800 unitsper year at $62 net cash flow apiece for the next 10 years. Inother words, the annual operating cash flow is projected to be $62× 6,800 = $421,600. The relevant discount rate is 16 percent, andthe initial investment required is $1,790,000. After the firstyear, the project can be dismantled and sold for $1,660,000.Suppose you think it is likely that expected sales will be revisedupward to 9,800 units if the first year is a success and reviseddownward to 5,400 units if the first year is not a success. Supposethe scale of the project can be doubled in one year in the sensethat twice as many units can be produced and sold. Naturally,expansion would be desirable only if the project were a success.This implies that if the project is a success, projected salesafter expansion will be 19,600. Note that abandonment is an optionif the project is a failure.a. If success and failure are equally likely, what is the NPV ofthe project?b. What is the value of the option to expand?