Oklahoma Instruments (OI) Is Considering a Project Called F-200 That

question 6

Multiple Choice

Oklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200's expected cash flows will be
$110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.
-Now assume that one year from now OI will know if the F-100 has become the industry standard. Also assume that after receiving the cash flows at t = 1, OI has the option to abandon the project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option?

• A) $0
• B) $2,075
• C) $4,067
• D) $8,945
• E) $10,745

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Definitions:

Neurological Damage

Harm or dysfunction in the nervous system, often resulting from injury, illness, or trauma.

Radial Pulse

The pulse felt at the wrist where the radial artery runs, used to measure heart rate and rhythm.

Apical Pulse

The heart rate as measured at the apex of the heart, typically through auscultation with a stethoscope, reflective of the actual heartbeat.

Pulse Deficit

The difference between the heart rate measured at the apex of the heart and the rate measured at the wrist or other peripheral site, indicating a discrepancy in the heart's efficiency.