Acme Co. is considering a four-year project that will require an initial investment of $9,000. The base-case
Question:
What would be the expected net present value (NPV) of this project if the project's cost of capital is 13%?
• $32,836
• $29,981
• $25,698
• $28,553
Acme 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 $4,750 (at the end of year 2). The $4,750 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 -$1,500 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.
• $30,266
• $28,753
• $33,293
• $37,833
What is the value of the option to abandon the project?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Valuation The Art and Science of Corporate Investment Decisions
ISBN: 978-0133479522
3rd edition
Authors: Sheridan Titman, John D. Martin
Question Posted: