Question $7(1$ point$)$

You have projected the following CFs for a project. You are interested in considering

the NPVif you add an abandonment option. If the project is in the worst case

scenario, then in year two the project will be shut down and liquidated, i$.$e$.,$ this will

happen at the end of year two. If abandoned, after all sales of assets and associated

shut down costs, the year two CF will be $$100.$ What is the projects' NPVunder this

abandonment option scenario? Assume a WACC of $10\%.$

Yearly Projected CF for Alternative Scenarios

Scenario Prob

$1$

$2$

$3$

$4$

NPV

Best

$\mathrm{.}25$

$($$$3,812)$ $$3,813$ $$4,634$ $$5,256$

$$8,705$ $$13,378\mathrm{.}66$

Base $\mathrm{.}50$

$($$$4,207)$ $$1,048$ $$1,296$ $$980$

$$2,171$

$$35\mathrm{.}91$

Worst $\mathrm{.}25$

$($$$4,703)($$$283)($$$64)($$$737)($$$410)($$$5,846\mathrm{.}92)$

NOTE: Enter your answer to the nearest dollar value. For example, if your answer is

$-$$$4,567\mathrm{.}89,$ enter $-4,568$

scenario, then in year two the project will be shut down and liquidated, i$.$e$.,$ this will

happen at the end of year two. If abandoned, after all sales of assets and associated

shut down costs, the year two CF will be $$100.$ What is the projects' NPV under this

abandonment option scenario? Assume a WACC of $10\%.$

Yearly Projected CF for Alternative Scenarios

Scenario Prob

$1$

$2$

$3$

$4$

NPV

Best

$25$

$($$$3,812)$ $$3,813$ $$4,634$ $$5,256$ $$8,705$ $$13,378\mathrm{.}66$

Base $50$

$($$$4,207)$ $$1,048$ $$1,296$ $$980$ $$2,171$ $$35\mathrm{.}91$

Worst $\mathrm{.}25$

$($$$4,703)($$$283)($$$64)($$$737)($$$410)($$$5,846\mathrm{.}92)$

NOTE: nter your answer to the nearest dollar value. For example, if your answer is

$-$$$4,567\mathrm{.}89,$ enter $-4,568$

Your Answer:

Answer