Question
Brandt 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
Brandt 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 = | 11.50% | dollars in thousands | NPV each | prob x | |||
| Year | 0 | 1 | 2 | 3 | scenario | NPV | |
| prob scenario 1 | 30.0% | $(1,000.00) | $ 800.00 | $ 800.00 | $ 800.00 | $ 938.10 | $ 281.43 |
| prob scenario 2 | 60.0% | $(1,000.00) | $ 520.00 | $ 520.00 | $ 520.00 | $ 259.76 | $ 155.86 |
| prob scenario 3 | 10.0% | $(1,000.00) | $ (200.00) | $(200.00) | $(200.00) | $(1,484.52) | $(148.45) |
| E[NPV] = | $ 288.83 | ||||||
| a. | $61.03 | |
| b. | $67.29 | |
| c. | $57.98 | |
| d. | $64.08 | |
| e. | $30.52 |
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
12th edition
978-0324597714, 324597711, 324597703, 978-8131518571, 8131518574, 978-0324597707
