Abandonment option: Consider a 3-year project with a 14.00% cost of capital. The initial investment is $1,000 and the expected cash flows are $400 per year.

a. Calculate NPV and determine whether or not to undertake this project.

b. Suppose instead that we have more information on the expected cash flows. First, there is a 40.00% probability that the project is a success and the cash flows will be $700 and a 60.00% probability that the project is a failure and the cash flows will be $200. In addition, at the end of the first year, we will know whether the project is a success or a failure. We have the option to abandon the project at the end of the first year and receive the salvage value of $850. First, determine the optimal abandonment strategy. Then calculate the project's NPV and the value of the abandonment option using that strategy.

what is the NPV if a failure

What is the NPV If a success

What is NPV including option

Answer rating: 100% (QA)

a To calculate the NPV of the project without considering the abandonment option we can use the form... View the full answer