Question
A company is considering investing in a project with an option to abandon it in the future if the market condition turns unfavorable. The company
A company is considering investing in a project with an option to abandon it in the future if the market condition turns unfavorable. The company estimates the following scenarios. Please calculate the value of the option. Favorable market condition: NPV=$12,758 Unfavorable market condition with option to abandon early: NPV=-$12,260 Unfavorable market condition without option to abandon early: NPV=-$65,250 Probability of favorable market condition: 75% Probability of unfavorable market condition: 25%
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Fundamentals of Investment Management
Authors: Geoffrey Hirt, Stanley Block
10th edition
0078034620, 978-0078034626
