A Project Is Worth $12 Million Today Without an Abandonment

question 2

Multiple Choice

A project is worth $12 million today without an abandonment option if the interest rate is 5 percent per year. Suppose the value of the project is either $18 million one year from today (if product demand is high) or $8 million (if product demand is low) . It is possible to sell off the project for $10 million if product demand is low. Calculate the value of the abandonment option if the discount rate is 5 percent per year.

• A)$1.03 million
• B)$0.88 million
• C)$1.90 million
• D)$5.14 million

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Definitions:

Continental Crust

The thick part of the Earth's crust that forms the large landmasses. It is generally older and more complex than oceanic crust.

Basalt

A fine-grained, dark-colored mafic igneous rock, with or without vesicles and phenocrysts of pyroxene, olivine, or feldspar.

Dark Lava Rock

Often basalt, this is a type of volcanic rock that is rich in iron and magnesium, giving it a dark coloration.

Continental Crust

The thick part of the Earth's crust that forms the continents and continental shelves, consisting mainly of granitic rocks.