Steppingstone Incorporated The Z−90 Project Being Considered by Steppingstone Incorporated (SI) Has

question 12

Multiple Choice

Steppingstone Incorporated
The Z−90 project being considered by Steppingstone Incorporated (SI) has an up-front cost of $250,000.The project's subsequent cash flows are critically dependent on whether another of its products, Z−45, becomes an industry standard.There is a 50% chance that the Z−45 will become the industry standard, in which case the Z−90'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 Z−45 will not become the industry standard, in which case the Z−90'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%.
-Refer to data for Steppingstone Incorporated (SI) .Now assume that one year from now SI will know if the Z−45 has become the industry standard.Also assume that after receiving the cash flows at t = 1, SI 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

---

Definitions:

Organizational Culture

The shared values, beliefs, and practices that shape the social and psychological environment of a business organization.

Collective Identity

The shared sense of belonging to a group, where members identify with the group's characteristics, goals, or attitudes.

Innovation Process

The series of steps involved in creating and implementing new ideas, products, or methods.

Idea Creation

The process of generating novel and useful concepts, often involving creativity, critical thinking, and collaboration.