High Roller Properties is considering building a new casino at an after-tax cost of $9.5 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.30 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. a. $689 b. $949 c. $1,638 Od. $1,098 e. $260

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
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High Roller Properties is considering building a new casino at an after-tax cost of $9.5 million at t = o. The after-tax cash flows the
casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it
passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be
$3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to
abandon the project 1 year from now, in which case the property could be sold to net $6.30 million after taxes at t = 1. What is the
value (in thousands) of this abandonment option? Do not round intermediate calculations.
a. $689
b. $949
c. $1,638
Od. $1,098
e. $260
Transcribed Image Text:High Roller Properties is considering building a new casino at an after-tax cost of $9.5 million at t = o. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.30 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. a. $689 b. $949 c. $1,638 Od. $1,098 e. $260
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