What is the value of the option to abandon the project

Reference no: EM13271856

Alpha Co is considering a four-year project that will require an initial investment of $7000. 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 $20,000 per year, and the worst case cash flows are projected to be $-1000 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 NPV of this project if the project's cost of capital is 11%.

A$22,398
B$30,304
C$28,986
D$26,351

Alpha 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 worse-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 $4750. The $4750 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 -$1000 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.

Now find the NPV of this project when taking the abandonment option into account.

A$26,472
B$27,865
C$33,438
D$29,258

What is the value of the option to abandon the project?

A$1060
B$984
C$1363
D$1514
E$1211

Reference no: EM13271856

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