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A new 12-year project has estimated sales of 7,500 units per year, an end-of-year net cash...

A new 12-year project has estimated sales of 7,500 units per year, an end-of-year net cash flow of $65 per unit, a discount rate of 15.5 percent, and an initial cost of $2.5 million. Sales will be revised upward to 8,200 units if the first year is a success and revised downward to 5,000 units if the first year is not a success. Suppose the scale of the project can be doubled in one year thereby increasing the sales projected to 16,800 units. Naturally, expansion would be desirable only if the project is a success. The project could also be dismantled after the first year and sold for $1,900,000. Assume that success and failure are equally likely. What is the current value of the option to expand?

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