Ms. Magna has thought of another possibility. She could abandon the venture entirely by selling the plane at the end of the first year. Suppose that the piston-engine plane can be sold for $150,000 and the turboprop can be sold for $500,000.

a. In what circumstances would it pay for Ms. Magna to sell either plane?

b. Redraw the decision tree in Figure 10.8 to recognize that there will be circumstances in which Ms. Magna will choose to take the money and bail out.

c. Recalculate the value of the project recognizing the abandonment option.

d. How much does the option to abandon add to the value of the piston-engine project? How much does it add to the value of the turboprop project?

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High demand (8 $960 High demand (6) $150 Low demand (2) $220 High demand (4) $930 Low demand (4) $30 Tuiboprop -$550 Low demand (6) $140 High demand (8) $900 Expand -$150 Low demand ( 2 $100 High demand (6) 3100 Piston -$250 High demand (8) $410 Do not expand Low demand (2) $180 High demand (4) $220 Low demand (4) $50 Low demand (6 $100