Brandt Enterprises is considering a new project that has a cost 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 to the firm? a. $64.08 b. $55.08 c. $67.29 d. $61.03 e. $57.98
Brandt Enterprises is considering a new project that has a cost 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 to the firm? a. $64.08 b. $55.08 c. $67.29 d. $61.03 e. $57.98
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question 33
Brandt Enterprises is considering a new project that has a cost 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 to the firm?
| a. |
$64.08
|
|
| b. |
$55.08
|
|
| c. |
$67.29
|
|
| d. |
$61.03
|
|
| e. |
$57.98
|
Transcribed Image Text:WACC=11.5%
Dollars in Thousands
NPV This
Prob, x
t =0
t =1
t =2
$800.0
$520.0
-$200.0
State
$938.10
$259.76
t=3
NPV
Prob. = 20%
Prob. = 60%
Prob. 20%
$800.0
$520.0
-$200.0
$800.0
$187.62
-$1,000.
$520.0
-$200.0
$155.86
-$1,484.52
-$296.90
Exp. NPV = $ 46.57
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