You have been hired as a financial analyst to do a feasibility study of a new...

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You have been hired as a financial analyst to do a feasibility study of a new product. Marketing research suggests that there is a 70% probability that the net cash flow (after tax) will be $2200 for the next 2 years, and a 30% probability that the net cash flow (after tax) will be $500 for the next 2 years. The relevant discount rate is 6%. The required initial investment is $2600. The firm can pay for an option to abandon the project in year one if the net cash flow is $500. The firm will recover half of the investment if it abandons. Estimate the value of the option to abandon, round your answer to the nearest dollar. You have been hired as a financial analyst to do a feasibility study of a new product. Marketing research suggests that there is a 70% probability that the net cash flow (after tax) will be $2200 for the next 2 years, and a 30% probability that the net cash flow (after tax) will be $500 for the next 2 years. The relevant discount rate is 6%. The required initial investment is $2600. The firm can pay for an option to abandon the project in year one if the net cash flow is $500. The firm will recover half of the investment if it abandons. Estimate the value of the option to abandon, round your answer to the nearest dollar.

Answer rating: 100% (QA)

To estimate the value of the option to abandon the project we can use the concept of decision tree a... View the full answer