Suppose we are considering a project. The cost today is $1,000. In one year the project is either a success with a probability of 70% or a failure with a probability of 30%. The discount rate is 10%. The lump-sum value of all successful future payoffs at time 1 is $1,600. The lump-sum value of all unsuccessful future payoffs at time 1 is 0. However, we expect to have the option to abandon the project if the outcome turns out to be unsuccessful at time 1. By abandoning the project we can get back $100 net salvage value. 

What is the value of the abandon option?

Answer rating: 100% (QA)

To calculate the value of the abandon option for the project we can use the concept of real options ... View the full answer