High Roller Properties is considering building a new casino at an after-tax cost of $10.0 million...

 

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High Roller Properties is considering building a new casino at an after-tax cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.00 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. a. $314 b. $964 c. $126 d. $503 e. $189 High Roller Properties is considering building a new casino at an after-tax cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.00 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. a. $314 b. $964 c. $126 d. $503 e. $189

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Answer d 503 Explanation The value of the abandonment option can be calculated by discounting the ex... View the full answer