ABC Inc. is considering investing in a 5-year project that has a 10% discount rate, requires...

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ABC Inc. is considering investing in a 5-year project that has a 10% discount rate, requires an initial investment of £800000. Suppose that there is a 30% probability that the yearly cash flows will be £150000 and a 70% probability that they will be £350000. In addition, at the end of the 1st year we will know whether the project is a success (cash flow is £350000) or a failure (£150000), and we have the option to abandon the project at the end of the first year and receive the salvage value of £500000. First determine the optimal abandonment strategy. Then calculate the project's NPV and the value of the abandonment option using that strategy. Conclude. ABC Inc. is considering investing in a 5-year project that has a 10% discount rate, requires an initial investment of £800000. Suppose that there is a 30% probability that the yearly cash flows will be £150000 and a 70% probability that they will be £350000. In addition, at the end of the 1st year we will know whether the project is a success (cash flow is £350000) or a failure (£150000), and we have the option to abandon the project at the end of the first year and receive the salvage value of £500000. First determine the optimal abandonment strategy. Then calculate the project's NPV and the value of the abandonment option using that strategy. Conclude.

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Optimal Abandonment Strategy The optimal abandonment strategy for this project will depend on the ex... View the full answer