Herman Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $20,000 per year, and the worst-case cash flows are projected to be $1,000 per year. The companys analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows.

1) What would be the expected net present value (NPV) of this project if the projects cost of capital is 14%?

A. $23,691

B. $31,588

C. $30,271

D. $26,323

Herman now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow of $4,750 (at the end of year 2). The $4,750 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the projects assets and the companys $1,000 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project.

2) Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account.

A. $29,133

B. $36,070

C. $34,683

D. $27,746

3) What is the value of the option to abandon the project?

A. $996

B. $1,281

C. $1,494

D. $1,423

E. $1,138