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Kramerica industries is considering a project called container 2 that has an up front cost of $300,000. the project's subsequent cash flows are critically dependent on whether another of its products, Container 1 becomes a sales hit. There is a 45% chance that container 1 will become a sales hit, in which case container 2's expected cash flows will be $190,000 at the end of each of the next 3 years. There is a 55% chance that container 1 will not become a sales success, in which case container 2's expected cash flows will be $40,000 at the end of each of the next 3 years. assume that the cost of capital is 10%. (1.) based on the above information, what is the containers 2's expected net present value? (2) NOw assume that one year from now Kramerica industries will know if container 1 has become a sales hit. also assume that after receiving the cash flow at t=1, Kramerica industries has the option to abandon the project, in which case it will recieve an additional $180,000 at t=1 but no cash flow after t=1. assuming that the cost of capital remains at 10%, what is the estimated value of the abandonment option?

Financial Management, Finance

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