Bursik Inc

Bursik Inc. is considering a project which would require a $2.5 million investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 45% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $165,000 at the end of each of the next 5 years. There is a 55% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $975,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $165,000 cash flow at t = 1, and the property will be sold netting $1.26 million (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project's expected NPV if it can be abandoned?

a)   $    48,263.95

b)   $    82,013.66

c)   $   115,763.95

d)   $   774,651.22

e)   $1,196,017.10