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

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Definitions:

Counterconditioning

A behavior therapy technique where a negative or unwanted response to a stimulus is replaced with a positive one through conditioning.

Conditioned Stimulus

A previously neutral stimulus that, after association with an unconditioned stimulus, elicits a conditioned response.

Unconditioned Stimulus

A stimulus that naturally and automatically triggers a response without any need for learning.

Unconditional Positive Regard

A concept in psychology emphasizing the acceptance and support of a person regardless of what the person says or does, especially in the context of client-centered therapy.