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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, the company estimates that the present value of cash flows in one year will be $24 million. If the demand is low, the present value of cash flows in one year will be $9 million. The value of the facility today under these assumptions is $18 million. Suppose that the company can sell the facility for $12 million in one year if the demand is low. The risk-free rate is 5 percent per annum Required: Calculate the value of the option to abandon
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