How much is the option to abandon worth to the firm

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Reference no: EM131540074

Aggarwal Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most-likely scenarios. The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties. How much is the option to abandon worth to the firm? WACC = 11.5% Dollars in Thousands NPV this Prob t=0 t=1 t=2 t=3 State NPV Prob = 20% $750.0 $750.0 $750.0 $817.0 $163.4 Prob = 60% -$1,000 $520.0 $520.0 $520.0 $259.8 $155.9 Prob = 20% -$250.0 -$250.0 -$250.0 -$1,605.7 -$321.1 Exp. NPV= $–1.8

Reference no: EM131540074

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