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Question
Aggarwal Enterprises is considering a new project that has an initial cash outflow of $1,000,000, and the CFO set up the following simple decision tree to show its three most-likely scenarios. The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties. How much is the option to abandon worth (in thousands of dollars) to the firm? Do not round the intermediate calculations.
WACC = 11.5% Dollars in Thousands NPV this Prob x
t = 0 t = 1 t = 2 t = 3 State NPV
Prob = 20% $800.0 $800.0 $800.0 $938.1 $187.6
Prob = 60% -$1,000 $520.0 $520.0 $520.0 $259.8 $155.9
Prob = 20% -$170.0 -$170.0 -$170.0 -$1,411.8 -$282.4
Exp. NPV= $61.1
u200b
a. $59.7
b. $44.6
c. $58.1
d. $57.1
e. $51.9
Answer
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