Discuss on anon don or continue of the project using NPV analysis.

Five years ago you began development of a shopping mall in an upcoming residential area near the town of Superior, CO. You've spent already $20 million (already fully depreciated) on infrastructure and basic structures and now you are about to begin developing the main structure. Demand for shopping mall retail space has declined tremendously over the past two years, and at this point you're not sure whether it's worth going forward with the project. Your analysts have estimated that today the project, in its current state, is worth around $7 million.

If you decide to go forward with the project, you will have to invest an additional $10 million right now. You will be able to depreciate this investment over 10 years using the straight-line method. You hope to be done with the construction in 1 year. If at that point the demand for retail space picks up, you could generate an average of $3 million per year in free cash flows, for the next 10 years. Otherwise, this estimate goes down to an average of $ 1 million per year for the next 5 years. Assume that you will be able to generate your first rental income the moment you're done building the mall. Assume also that the salvage value of the mall at the end of the operating period (10 years if demand picks up or 5 years otherwise) is $15 million. It is common knowledge that given the state of the economy today, the likelihood that the demand for retail space next year picks up is 60%. Finally, assume that the opportunity cost of capital for this project is 10% and that your marginal tax rate is 40%. Should you abandon or continue with the project? What is the NPV of the option to continue?