Homework Chapter 12 - Cash Flow Estimation and Risk Analysis 0 X Attempts Keep the Highest/3 8. Abandonment options Acme Co. is considering a four-year project that will require an initial investment of $9,000. The base-case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $26,000 per year, and the worst case cash flows are projected to be -$4,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cath frowt. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst case cash flows What would be the expected net present value (NPV) of this project If the project's cost of capital is 13%7 $28,587 $25,728 $34,304 $31,446 Acme now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow of $3,500 (at the end of year 2). The $3,500 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the project's assets and the company's - $4,500 cash outflow from operations. Additionally, it abandons the project, the company will have no cash flows in years 3 and the project 4 Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account $31,697 $33,282 $41,206 $38,036 What is the value of the option to abandon the project? Grade It Now Save & Continue