High Roller Properties Is Considering Building a New Casino at a Cost

question 35

Multiple Choice

High Roller Properties is considering building a new casino at a cost of $10 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 11.0%.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 $6.5 million after tax at t = 1.What is the value (in thousands) of this abandonment option?

• A)$202
• B)$224
• C)$249
• D)$277
• E)$308

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