We are examining a new project. We expect to sell 5,000 unitsper year at $64 net cash flow apiece for the next 10 years. Inother words, the annual operating cash flow is projected to be $64× 5,000 = $320,000. The relevant discount rate is 13 percent, andthe initial investment required is $1,610,000. After the firstyear, the project can be dismantled and sold for $1,210,000.Suppose you think it is likely that expected sales will be revisedupward to 8,000 units if the first year is a success and reviseddownward to 3,600 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 16,000. Note that abandonment is an optionif the project is a failure.

  

If success and failure are equally likely, what is the NPV ofthe project? (Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

What is the value of the option to expand? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

  

Option value

$