Question
Consider a $1310 investment that will produce perpetual cash flows. If the demand is high, the expected cash flows will be $161 per year. Otherwise,
"Consider a $1310 investment that will produce perpetual cash flows. If the demand is high, the expected cash flows will be $161 per year. Otherwise, the expected cash flows will be $46 per year. The initial probabilities for high vs. low demand are 80%/20%, but after the first cash flow is realized, the firm will know with certainty whether the demand is high or low. At that time, the project can be abandoned with a terminal cash flow of $1259. The cost of capital is 5%. What is the NPV including the option to abandon?"
"$1,649 " | ||
"$1,284 " | ||
"$1,515 " | ||
"$1,426 " | ||
"$1,620 " |
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