Crusher Company, which requires a 10% return on its projects, is considering starting a new product line, which would require a $2000000 up-front investment, and would generate sales over 5 years. There is a 25% chance that the product could do poorly, in which case annual revenues would be $750000 and annual costs would be $400000. There is a 75% chance that the product will do well, in which case annual revenues would be $1500000 and annual costs would be $600000. The company will not know for certain whether the product is doing well or poorly until it has been on the market for a year. The production technology could then be converted for use in regular operations, which would cost $500000 in Year 2, but would save the company $750000 per year on its existing costs in Year 3 through 5.

a. Calculate the value of the project using real options analysis.

b. Calculate the value of the real options associated with the project.