You are a capital-budgeting analyst for SpaceX. SpaceX ispondering the construction of a moon-tourism spaceship, requiringan outflow of $400 at t=0. If fully constructed, the spaceship willexpire in 10 years, with cash flows at t=8 through t=10. You do notknow whether the ship will be a success or a failure, until newinformation emerges at t=7. You forecast that, if the ship looks tobe a success, the cash flows from t=8 through t=10 will be $600,$700, and $800, respectively. If the endeavor looks to be afailure, the same three cash flows will be $300, $350, and $400.The company has the option, at t=7, to abandon by selling the shipto Roskosmos for $840. Current forecasted probabilities are 55% forsuccess and 45% for failure. Using a discount rate of 16%/year,calculate (a) the expected NPV of this project without theabandonment option and (b) the value that the abandonment option(i.e., the option to sell the ship to Roskosmos) contributes to theproject.
