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Feldstein Drug Company is considering a new drug, which would be sold over the counter without a prescription. To develop the drug and to market it on a regional basis will cost $12 million over the next 2 years, $6 million in each year. Expected cash inflows associated with the project for years 3 through 8 are $1 million, $2 million, $4 million, $4 million, $3 million, and $1 million, respectively. If the project is successful, at the end of year 5 the company will have the option to invest an additional $10 million to secure a national market. The probability of success is .60; if not successful, the company will not invest the $10 million and there will be no incremental expected cash flows. If successful, however, cash flows are expected to be $6 million higher in each of the years 6 through 10 than would otherwise be the case with a probability of .50, and $4 million higher with a probability of .50. The company's required rate of return for the project is 14 percent.

a. What is the net present value of the initial project? Is it acceptable?

b. What is the worth of the project if we take account of the option to expand? Is the project acceptable?