Question
CSI Properties is developing a new amusement park that will have a startup cost of ten million dollars. The after-tax cash inflows the amusement park
CSI Properties is developing a new amusement park that will have a startup cost of ten million dollars. The after-tax cash inflows the amusement park generates will depend on whether the local city government passes a new law imposing a new income tax. Currently there is a 50% chance the law will pass. If the law is passed CSIs after-tax cash inflows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. CSIs has a discount rate of 11.0%. If the tax is passed, CSI Properties has the option to abandon the project after one year. If they exercise this option then the property can be sold to net $6.5 million after tax at the end of the first year. What is the value (in thousands) of this abandonment option?
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