Decision tree analysis

Abandon$/$quit Real option type

$1$ Real option expiration, in years

$15\%$ Discount rate $($WACC$)$

$4\mathrm{.}0$ Year $1$ salvage value, after tax $($$ millions$)$

Demand Scenario Pr$()012345$

a $40\%-251515151515$

b $15\%-2577777$

c $15\%-25522-7\mathrm{.}5-7\mathrm{.}5$

d $30\%-2520-10-10-10$

Values in millions of dollars except for percentages

Compute the expected NPV of the project based using the data above but ignoring the option to abandon.

Should the manager accept the project if they ignore the option to abandon?

Compute the standard deviation of the project NPVs across the different scenarios when ignoring the real option.

Create a new cash flow schedule that optimally exercises the option to abandon.

In which demand scenario$($s$)$ should management abandon the project?

What is the new project expected NPV if you allow the real option to be exercised?

What is the new standard deviation of project NPVs if you allow the real option to be exercised?

How do the expected NPVs and standard deviations compare to each other?

The current discount rate is the WACC. How should you consider changing the discount rate based on your answer in Q$11?$