Estimate the Mean and Standard Deviation of the NPV of This

question 17

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:

Butyllithium

A powerful base and nucleophile used in organic synthesis to deprotonate hydrogens or to initiate anionic polymerization processes.

Benzaldehyde

An organic compound characterized by a benzene ring with an aldehyde functional group, known for its almond-like aroma and used in flavoring and perfume.

Methylamine

A simple organic compound with the formula CH3NH2, characterized by a strong ammonia-like odor, used in the production of pesticides and pharmaceuticals.

Reagents

Substances or compounds added to a system to cause a chemical reaction or are used to test for the presence of another substance.