Question
Wonderland Ltd is considering building a new Rapid Ride facility in its theme park. One year from now the company will know whether the ride
Wonderland Ltd is considering building a new Rapid Ride facility in its theme park. One year from now the company will know whether the ride will be accepted by park visitors. If the demand for the ride is high, he company estimates that the PV of cash flows in year 1 will be 24 million. If the demand is low, the PV of cash flows in year one will be 9 million. The value of the facility today under these assumptions is 18 million. Suppose the company can sell the facility for 12 million in one year if the demand is low. The risk free rate is 5 per cent per annum. Calculate the option to abandon.
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