Grolsch management has gone ahead with the investment in Problem 16.1. The market has grown increasingly competitive, and nearly all of the brewery investments in Central Europe are losing money. To make matters worse, variable production costs of D20/bottle are higher than expected. According to local laws, employees cannot be laid off so long as the brewery is open, and Grolsch must either produce at capacity or close the brewery. A competitor is considering exiting the market. If this brewer does not abandon, price will remain D15/bottle. If the brewer abandons, price will rise to D35/bottle. Assume Grolsch's abandonment decision does not influence the competitor's decision, so price uncertainty is exogenous. The following facts apply to the abandonment decision:

Cost of abandoning ; rises by 10% each year Current price of beer per bottle in perpetuity Price of beer in 1 year or D35 with equal probability Variable production cost per bottle Fixed production costs per year Expected production bottles per year forever Discount rate Note that the cash flows of this abandonment option are similar to those of the investment option. Grolsch management can pay an exercise price today to avoid future losses. But avoiding future losses is the same thing as receiving a net cash inflow—
just as in the investment option.

a. Draw a decision tree that depicts Grolsch's investment decision.

b. Calculate the NPV of abandoning as if it were a now-or-never alternative.

c. Calculate the NPV of waiting one year before making a decision.

d. Calculate the NPV of abandoning today, including all opportunity costs.

e. Should Grolsch abandon this losing venture today?