Estimate the Mean and Standard Deviation of the NPV of This

question 1

Essay

Estimate the mean and standard deviation of the NPV of this project.Assume that cash flows are discounted at a rate of 10% per year.Now assume that the project has an abandonment option.At the end of each year you can abandon the project for the values given below: For example,suppose that year 1 cash flow is $400.Then,at the end of year 1,you expect cash flow for each remaining year to be $400.This has an NPV of less than $6200,so you should abandon the project and collect $6200 at the end of year 1.Estimate the mean and standard deviation of the project with the abandonment option.How much would you pay for the abandonment option? (Hint: You can abandon a project at most once.Thus,in year 5,for example,you abandon only if the sum of future expected NPVs is less than the year 5 abandonment value and the project has not yet been abandoned.Also,once you abandon the project,the actual cash flows for future years will 0.So,the future cash flows after abandonment should disappear.)

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Definitions:

Performance Deterioration

A decline or reduction in the efficiency, quality, or effectiveness of an individual's or group's work performance over time.

Motivation To Transfer

The level of an individual's intention or desire to apply the skills and knowledge gained from training back to their job or daily activities.

Cognitive Ability

The capacity to perform higher mental processes of reasoning, remembering, understanding, problem-solving, and decision-making.

Self-Efficacy

A person's confidence in their capability to accomplish tasks and realize objectives.