Question

FIN500, Inc. has the following project. It is a 4 year project and required initial investment of $10 million. Depreciation is straight-line over 4 years. Initial net working capital requirement is $1.5 million and is fully recoverable whenever the project ends. The company estimates to generate $8 million pretax revenues and $3 million pretax operating costs. The tax rate is 34%, and the discount rate is 15%. The market value of the equipment over the life of the project is given in the following table:
Year Market Value ($ millions)
1 $7.2
2 $6.2
3 $5.0
4 $2.5
5 $0.0

How much is the NPV of the project if the company abandons the project after 1 year, 2 years, 3 years, and after 4 years? When should it abandon the project? How much is the value of option to abandon?