Question
A preliminary analysis of a project indicates the following: NPV of Project Scenario Year CF mil. Unconditional Probability PVF CF*Prob.*PVF Initial 0 -50 100% 1
A preliminary analysis of a project indicates the following:
NPV of Project | |||||
Scenario | Year | CF mil. | Unconditional Probability | PVF | CF*Prob.*PVF |
Initial | 0 | -50 | 100% | 1 | -50.000 |
H | 1 | 25 | 70% | 0.90909 | 15.909 |
L | 1 | 10 | 30% | 0.90909 | 2.727 |
HH | 2 | 85 | 49% | 0.82645 | 34.421 |
HL | 2 | 70 | 21% | 0.82645 | 12.149 |
LH | 2 | 45 | 12% | 0.82645 | 4.463 |
LL | 2 | 20 | 18% | 0.82645 | 2.975 |
|
|
|
| NPV | 22.645 |
A financial analyst uncovers additional information not incorporated in the calculations above:
In year 1, if scenario equals L, the firm can abandon operations and realize a liquidation value of $30 million from its assets.
Using the DTA approach, answer the following two questions:
What is the NPV of the project?
What is the NPV of the option to abandon?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started