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A project is worth $12 million today without an abandonment option. Suppose the value of the project is $18 million one year from today with high demand and $8 million with low demand. It is possible to sell off the project for $10 million if the demand is low. Calculate the value of the abandonment option if the discount rate is 5% per year. [Use the risk-neutral valuation]
A. $1.03 million.
B. $2 million.
C. $1.9 million.
D. None of the above.
Equilibrium Price
The pricing point where the volume of a good or service provided equals the volume demanded, achieving market harmony.
Market-Clearing Price
The price at which the quantity of a product offered is equal to the quantity of the product in demand, clearing the market.
Market Price
The current price at which an asset or service can be bought or sold in the open market, determined by supply and demand dynamics.
Equilibrium Price
The price at which the quantity of goods supplied is equal to the quantity of goods demanded in the market.
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