Evaluating a Project with Real Options Consider a project with the following details: Initial outlay = $550,000 Project life = 5 years Salvage value at termination = $0 Required rate of return = 10% There is a 50% probability that annual after-tax operating cash flows will be $90,000 and a 50% probability that they will equal $180,000. At the end of Year 1, the company will be able to decide whether to abandon the project or to continue. If it decides to abandon the project, the company will receive a salvage value of $400,000. Calculate the value of the project without the abandonment option. Calculate the value of the project with the abandonment option and determine the value of the option.

Answer rating: 100% (QA)

To calculate the value of the project without the abandonment option we need to calculate the present value of the expected cash flows over the projec... View the full answer