A Project Is Worth $15 Million Today Without an Abandonment

question 7

Multiple Choice

A project is worth $15 million today without an abandonment option. Suppose the value of the project is either $20 million one year from today (if product demand is high) or $10 million (if product demand is low) . It is possible to sell off the project for $13 million if product demand is low. Calculate the value of the abandonment option if the discount rate is 5 percent per year.

• A)$1.21 million
• B)$2.86 million
• C)$1.90 million
• D)$1.64 million

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Definitions:

Credit Sales

Sales made by a business that are to be paid for by the customer at a later date.

Cash Receipts

The total amount of cash collected by a business during a specific period, including payments from customers and other sources.

Budgeted Sales Data

Predictions or estimates of the sales, both in units and financial terms, that a company expects to achieve in a future period.

Sales On Account

Transactions where goods or services are sold with the agreement that payment will be made at a later date, typically recorded as accounts receivable.