Illinois Project Masters (ILPM) intends to engage in a four-year project. Yet, the CEO of ILPM...

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Illinois Project Masters (ILPM) intends to engage in a four-year project. Yet, the CEO of ILPM intends to have an exit door from that project (i.e., an abandonment option at the end year 3) if the economic situation deteriorates. The probabilities for the occurrence of each of three states of the economy are as follows: Best (p=28.75%), Base (p=52.15%), and Worst (p=19.10%). The WACC (EAR) is 8.45% Cash Flow (year) Now 1 2 3 4 Project without Abandonment Option Best Worst Base -$3,690,950 -$3,690,950 $1,234,510 $910,340 $2,010,360 $1,523,400 $1,845,230 $1,340,650 $760,230 $710,340 -$3,690,950 $315,470 $813,310 $915,640 $314,650 Project with Abandonment Option Bad, but not Worst A. [12 points] What is the value of the abandonment option? B. [10 points] Compute the standard deviations pertaining to each of the two NPVs. C. [3 points] Compute the coefficients of variation pertaining to each of the two NPVs. -$3,690,950 $315,470 $1,350,650 $1,256,730 Nil Illinois Project Masters (ILPM) intends to engage in a four-year project. Yet, the CEO of ILPM intends to have an exit door from that project (i.e., an abandonment option at the end year 3) if the economic situation deteriorates. The probabilities for the occurrence of each of three states of the economy are as follows: Best (p=28.75%), Base (p=52.15%), and Worst (p=19.10%). The WACC (EAR) is 8.45% Cash Flow (year) Now 1 2 3 4 Project without Abandonment Option Best Worst Base -$3,690,950 -$3,690,950 $1,234,510 $910,340 $2,010,360 $1,523,400 $1,845,230 $1,340,650 $760,230 $710,340 -$3,690,950 $315,470 $813,310 $915,640 $314,650 Project with Abandonment Option Bad, but not Worst A. [12 points] What is the value of the abandonment option? B. [10 points] Compute the standard deviations pertaining to each of the two NPVs. C. [3 points] Compute the coefficients of variation pertaining to each of the two NPVs. -$3,690,950 $315,470 $1,350,650 $1,256,730 Nil

Answer rating: 100% (QA)

A To calculate the value of the abandonment option we need to find the present value of the cash flo... View the full answer