Show Computations for Parts I.II.III Figure 13.2

Figure 13.2. Analysis of an Abandonment Option (Dollars in Thousands)

Figure 13.2. Analysis of an Abandon- ment Option (Dollars in Thousands) 3 5 6 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 33 35 Part l. Cannot Abandon After-Tax Cash Flow at End of Period Outcome Best Case Base Case Worst Case Prob. 25% 1.000 41.000 41.000 $200 -$280 2 $400 -$280 00 $500 -$280 4 1.300 s 600 -$280 Expected NPV Standard Deviation (o) art II. Can Nyandon Coefficient ot Variation CV = o / E After-Tax Cash Flow at End of Period Outcome Best Case Base Case Worst Worst Prob. 50% 25% -$1 .ooo - 1.000 -$1 .ooo -$1 .ooo $400 -$280 -$280 S 600 00 -$280 $200 goo 500 -$280 $0 NPV 1 300 -$280 SO Expected NPV Standard (o) Coefficient of Variation = CV = o / ted NPV Part l". Value of the Option Expected WV with the abandonrnent option Expected WV without the abandonment option CASE : the expected NPV without the abandonment option is positive, then NPV@ $1.348 -$1.888 1.1 83.2 NPV@ $1,348 -$088 Dont Use Sl ,089 Use $214 $14 Exrcted NPV with Value of the Option the abandonment option Expected NPV without the option CASE 2: the expected NPV without the abandonment option is negative, then Expected NPV with Value of the Option the abandonment option ote: M a NPV molect mt have an option then it woWd not be In these cases. the NPV without the abandonment option is zo.