Ch 13- Assignment - Real Options and Other Topics in Capital Budgeting Galbraith Co. is considering a four-year project

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Ch 13 Assignment Real Options And Other Topics In Capital Budgeting Galbraith Co Is Considering A Four Year Project 1 (41.97 KiB) Viewed 9 times

Ch 13- Assignment - Real Options and Other Topics in Capital Budgeting Galbraith Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $21,000 per year, and the worst-case cash flows are projected to be -$2,500 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 10%? O $28,665 $31,850 $33,443 $38,220 Galbraith 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 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 $4,500 (at the end of year 2). The $4,500 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 -$2,500 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. Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account. $34,192 Ⓒ$35,902 $39,321 $44,450 What is the value of the option to abandon the project?