Ch 12: Assignment - Cash Flow Estimation and Risk Analysis Back to Assignment Attempts: 0 Keep the Highest: 0/3 8. Abandonment options Albert Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $20,000 per year, and the worst case cash flows are projected to be -$1,000 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. 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 1347 $26.976 $24,278 $31,022 $32,371 Albert now wants to take into account its ability to abandon the project at the end of year 21 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 53,500 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 -51,000 cash outflow from operations. Additionally, if it abandons the project, the company wil bave no cash flows in years 3 and 4 of the project Ch 12: Assignment - Cash Flow Estimation and Risk Analysis $26,976 $24,278 $31,022 $32,371 Albert 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 -51,000 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account. 528,183 $35,229 $36,638 $29,592 What is the value of the option to abandon the project
