A project has a value of $25 million today. If demand turns out to be high, the project will be worth $40 million in 1 year. However, if demand turns out to be low, the project will be worth $17.5 million in 1 year. The project can be abandoned in 1 year for $22 million. The risk-free rate is 8%  

a) Calculate the value of the abandonment option using the binomial method. 

b) How would the value of the option change if the project were more volatile? Explain

Answer rating: 100% (QA)

To calculate the value of the abandonment option using the binomial method we need to create a binomial tree to represent the different possible outcomes of the project Lets assume that demand can eit... View the full answer