3. Abandonment options Albert Co. is considering a four-year project that will require an initial investment of $ 12,000. The base - case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $21,000 per year, and the worst-case cash flows are projected to be -$2,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base - case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project's cost of capital is 11% ? $24,066 $27,676 $22,863 $19,253 Albert now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow of $3,000 (at the end of year 2). The $3,000 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the project's assets and the company's -$2,500 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project. Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account. $26,051 $28,656 $32, 564 $23, 446 What is the value of the option to abandon the project?
3. Abandonment options Albert Co. is considering a four-year project that will require an initial investment of $ 12,000. The base - case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $21,000 per year, and the worst-case cash flows are projected to be -$2,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base - case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project's cost of capital is 11% ? $24,066 $27,676 $22,863 $19,253 Albert now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow of $3,000 (at the end of year 2). The $3,000 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the project's assets and the company's -$2,500 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project. Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account. $26,051 $28,656 $32, 564 $23, 446 What is the value of the option to abandon the project?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
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Transcribed Image Text:3. Abandonment options Albert Co. is considering a four-year project that will require an initial investment of $
12,000. The base - case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are
projected to be $21,000 per year, and the worst-case cash flows are projected to be -$2,500 per year. The company's
analysts have estimated that there is a 50% probability that the project will generate the base - case cash flows. The
analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25%
probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of
this project if the project's cost of capital is 11% ? $24,066 $27,676 $22,863 $19,253 Albert now wants to take into
account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario
cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow
of $3,000 (at the end of year 2). The $3,000 the company receives at the end of year 2 is the difference between the
cash the company receives from selling off the project's assets and the company's -$2,500 cash outflow from
operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project.
Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment
option into account. $26,051 $28,656 $32, 564 $23, 446 What is the value of the option to abandon the project?
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