Two projects have the following cash flows. Project B allows the firm to abandon the project...

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Two projects have the following cash flows. Project B allows the firm to abandon the project with a salvage value of $200 in year 2 if the economy is poor (50% chance). Assume r = 20%. The following table shows the original forecasted cash flows on the "decision tree". Project A (no embedded options): Year 0 Year 1 $400 A: - $300 $200 Year 2 $600 -$100 Project B (with an abandonment option in the second year): $300 $500 B: -$300 $150 -$100 What is the value of the option to abandon? Future Outcome Good Bad Good Bad Two projects have the following cash flows. Project B allows the firm to abandon the project with a salvage value of $200 in year 2 if the economy is poor (50% chance). Assume r = 20%. The following table shows the original forecasted cash flows on the "decision tree". Project A (no embedded options): Year 0 Year 1 $400 A: - $300 $200 Year 2 $600 -$100 Project B (with an abandonment option in the second year): $300 $500 B: -$300 $150 -$100 What is the value of the option to abandon? Future Outcome Good Bad Good Bad

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The detailed answer for the above question is provided below The value of the option to abandon is 1... View the full answer