Question

8. Abandonment options Galbraith Co. is considering a four-year project that will require an initial investment of $15,000. To $24,022 $1,249 $1,102 0 $25,223 $1,028 $27,625 $1,469 o $26,424 $1,175 What is the value of the option to abandon the proje

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Part A :-

Attaching the snapshots with values and formulas :-

в D E C Cost of Capital 13% Year Base Case Cash Flows PV Factors PV of Cash Flows (15,000.00) 1.00 (15,000.00) 15,000.00 0.88

А в Cost of Capital 0.13 Base Case Year Cash Flows PV Factors PV of Cash Flows 0 -15000 =1/(1+D$1)^B5 =C5*D5 1 15000 =1/(1+D$

ABC Cost of Capital 13% Best Case Year Cash Flows PV Factors PV of Cash Flows (15,000.00) 1.00 (15,000.00) 22,000.00 0.88 19,

в Cost of Capital 0.13 Best Case Year Cash Flows PV Factors PV of Cash Flows - 15000 =1/(1+D$12)^B15 =C15*D15 22000 =1/(1+D$1

A B Cost of Capital 13% Worst Case Year Cash Flows PV Factors PV of Cash Flows (15,000.00) 1.00 (15,000.00) (1,500.00) 0.88 (

AB Cost of Capital 0.13 Worst Case Year Cash Flows PV Factors PV of Cash Flows - 15000 =1/(1+D$22)^B25 =C25*D25 -1500 =1/(1+D

Expected NPV = (0.5 * 29,617.07) + (0.25 * 50,438.37) + (0.25 * -19,461.71) = $22,552.7

Correct Answer is Option A

Part B :-

Let us calculate the NPV of Worst case scenario taking into account abandonment option :-

ZA B C D Cost of Capital 13% Worst Case Year Cash Flows PV Factors PV of Cash Flows 0 (15,000.00) 1.00 (15,000.00) 1 (1,500.0

A B C Cost of Capital 0.13 Worst Case Year Cash Flows PV Factors PV of Cash Flows 0 - 15000 =1/(1+D$22)^B25 =C25*D25 1 - 1500

Hence, NPV in this case =

(0.5 * 29,617.07) + (0.25 * 50,438.37) + (0.25 * -13,586.42) = $24,021.52

Correct Answer is Option A

Part C:-

Value of Abandonment option =

( 24,021.52 - 22,552.7) = $1,468.82

Correct Answer is Option D

Add a comment
Know the answer?
Add Answer to:
8. Abandonment options Galbraith Co. is considering a four-year project that will require an initial investment...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • 8. Abandonment options Galbraith Co. is considering a four-year project that will require an initial investment...

    8. Abandonment options Galbraith 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 $14,000 per year. The best-case cash flows are projected to be $26,000 per year, and the worst-case cash flows are projected to be -$4,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...

  • 8. Abandonment options Shan Co. is considering a four-year project that will require an initial investment...

    8. Abandonment options Shan Co. is considering a four-year project that will require an initial investment of $9,000. The base-case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $21,000 per year, and the worst-case cash flows are projected to be -$2,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...

  • 8. Abandonment options Herman Co. is considering a four-year project that will require an initial investment...

    8. Abandonment options Herman Co. is considering a four-year project that will require an initial investment of $7,000. 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 company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...

  • 8. Abandonment options Albert Co. is considering a four-year project that will require an initial investment...

    8. Abandonment options Albert Co. is considering a four-year project that will require an initial investment of $12,000. The base-case cash flows for this project are projected to be $15,000 per year. The best-case cash flows are projected to be $22,000 per year, and the worst-case cash flows are projected to be -$1,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...

  • 8. Abandonment options Shan Co. is considering a four-year project that will require an initial investment...

    8. Abandonment options Shan Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $15,000 per year. The best-case cash flows are projected to be $22,000 per year, and the worst-case cash flows are projected to be -$1,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...

  • 8. Abandonment options Shan Co. is considering a four-year project that will require an initial investment...

    8. Abandonment options Shan Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $26,000 per year, and the worst-case cash flows are projected to be - $4,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think...

  • 8. Abandonment options Acme Co. is considering a four-year project that will require an initial investment of $15,...

    8. Abandonment options Acme Co. is considering a four-year project that will require an initial investment of $15,000. 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 $19,000 per year, and the worst-case cash flows are projected to be -$3,000 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...

  • 8. Abandonment options Albert Co. is considering a four-year project that will require an initial investment...

    8. Abandonment options Albert Co. is considering a four-year project that will require an initial investment of $9,000. 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 company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...

  • Galbraith Co. is considering a four-year project that will require an initial investment of $5,000. The...

    Galbraith 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 $19,000 per year, and the worst-case cash flows are projected to be -$3,000 per year. The company's 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...

  • Galbraith Co. Is considering a four-year project that will require an initial investment of $15,000. The...

    Galbraith Co. Is considering a four-year project that will require an initial investment of $15,000. 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 company's 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...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT