A company has recently carried out a post-completion audit at the end of Year 2 of a project that had an original investment of $100,000. It is concerned that the estimated cash flows are not going to be achieved.

The cash flows that were forecast when the investment decision was originally taken were as follows:

$

Year 1 60,000

Year 2 80,000

Year 3 (70,00)

Year 4 80,000

Year 5 60,000

The data from the post-completion audit show that the net cash outflow in Year 3 will be $90,000 and the cash inflows in Years 4 and 5 will be $60,000 and $40,000 respectively. You should assume that all cash flows with the exception of the original investment will arise at the end of the year.

The company's cost of capital is 12% per annum.

Required:

Demonstrate, using calculations, whether or not the project should be abandoned immediately. You should assume that there will be no additional costs associated with abandoning the project.