F1 Shan 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 tobe $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be -$3,000 peryear. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts alsothink 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-casecash flows.What would be the expected net present value (NPV) of this project if the project's cost of capital is 14%?$17,138$16,281O $17,995$18,852 Shan 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 scenariocash 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 $4,000 (at the end of year2). The $4,000 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the project's assetsand the company's -$3,000 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and4 of the project.Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account.$23,321$19,434$21,377$22,349What is the value of the option to abandon the project?

Shan 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 $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be -$3,000 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 14%? O $17,138 O $16,281 O $17,995 O $18,852

Shan 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 $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be -$3,000 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 14%? O $17,138 O $16,281 O $17,995 O $18,852

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 3MC: Tropical Sweets is considering a project that will cost $70 million and will generate expected cash...

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