Your company has developed a new battery and plan to do pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $400,000. Your management team believes that there is a 60% chance that the test marketing will be successful and that there will be sufficient demand for the battery. If the test-marketing phase is successful, then your company will invest $2 million in year one to build a plant that will generate expected annual after-tax cash flows of $300,000 in perpetuity beginning in year two. If the test marketing is not successful, your company can still go ahead and produce the new battery, but the expected annual after-tax cash flows would be only $150,000 in perpetuity beginning in year two. Your company has the option to stop the project at any time and sell the patent of the new battery to an overseas competitor for $250,000. Your company's cost of capital is 8%. a) Assuming that your company has the ability to sell the new battery in year one for $200,000, what is the NPV of the new battery project?
b) Describe the benefits and costs of delaying an investment opportunity.