Question: RFS Inc. has an ongoing project to enter a new market. A task force has conducted market analysis, and it shows that the future project

RFS Inc. has an ongoing project to enter a new market. A task force has conducted market analysis, and it shows that the future project value will vary depending on the market condition. Specifically, the project value will be $18 million one year from today if the market condition is good. On the other hand, the project value will be $8 million if the market condition is poor. Suppose that you have an abandonment option that allows you to dispose the project for $10 million next year if you want. What is the value of the option? Assume that the discount rate is 5% and the value of the project without the option is $12 million today.

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