What is the estimated value of the abandonment option

Reference no: EM13269601

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SI is considering investing in a new product named Z-90. There is a 50% chance that the product will be a success which then generates $110,000 cash inflow each year for the next 5 years. There is a 50% chance that the product will fail which then generates $25,000 cash inflow each year for the next 5 years. The project requires an initial investment of $250,000. Based on the above information, what is the Zï-90's expected net present value?

Now assume that one year from now SI will know if the Zï-45 has become the industry standard. Also assume that after receiving the cash flows at t = 1, SI has the option to abandon the project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option?

Reference no: EM13269601

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