Question
Aggarwal Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show
Aggarwal Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most-likely scenarios. The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties. How much is the option to abandon worth to the firm?
| WACC = | 11.5% | Dollars in Thousands | NPV this | Prob | |||
| t=0 | t=1 | t=2 | t=3 | State | NPV | ||
| Prob = | 20% | $850.0 | $850.0 | $850.0 | $1,059.2 | $211.8 | |
| Prob = | 60% | -$1,000 | $520.0 | $520.0 | $520.0 | $259.8 | $155.9 |
| Prob = | 20% | -$220.0 | -$220.0 | -$220.0 | -$1,533.0 | -$306.6 | |
| Exp. NPV= | $61.2 |
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Fundamentals of Financial Management
Authors: Eugene F. Brigham
Concise 9th Edition
1305635937, 1305635930, 978-1305635937
