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. 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%
Question 2 - Value of the option Favorable Market Condition Unfavorable Market Condition w/ option to abandon early Unfavorable Market Condition w/o option to abandon early Probability of favorable market condition Probability of unfavorable market condition Value of project w/ option Value of project w/o option Value of the option
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
