ABC Corporation is ordering a special-purpose piece of machinery costing $9,000 with a life of 2 years, after which there is no expected salvage value. The possible incremental net cash flows are:

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The company's required rate of return for this investment is 8 percent.

a. Calculate the mean of the probability distribution of possible net present values.

b. Suppose now that the possibility of abandonment exists and that the abandonment value of the project at the end of year 1 is $4,500. Calculate the new mean NPV, assuming the company abandons the project if it is worthwhile to do so. Compare your calculations with those in part a. What are the implications?


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