Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now, the company will know whether the new technology is accepted in the market. If the demand for the new filters is high, the present value of the cash flows in one year will be $17.5 million. If the demand is low, the value of the cash flows in one year will be $11.6 million. The value of the project today under these assumptions is $16.3 million and the risk-free rate is 6 percent. Suppose that, in one year, if the demand for the new technology is low, the company can sell the technology for $14.4 million.

What is the value of the option to abandon? Use the two-state model to value the real option. 

Answer rating: 100% (QA)

In this scenario If the demand is high the present value of cash flows in one year is 175 million If ... View the full answer