What is the value of the option to abandon

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Problem - We are examining a new project. We expect to sell 9,250 units per year at $196 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $196 * 9,250 = $1,813,000. The relevant discount rate is 20%, and the initial investment required is $6,030,000. Suppose you think it is likely that expected sales will be revised upward to 10,000 units if the first year is a success and revised downward to 4,800 units if the first year is not a success.

a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering.

b. After the first year, the project can be dismantled and sold for $3,068,000. What is the value of the option to abandon?

Reference no: EM132840084

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