Brandt Enterprises Is Considering a New Project That Has a Cost

question 78

Multiple Choice

Brandt Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most likely scenarios.The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties.How much is the option to abandon worth to the firm?

• A) $55.08
• B) $57.98
• C) $61.03
• D) $64.08
• E) $67.29

---

Definitions:

Exponentially Distributed

Refers to a type of statistical distribution that is often used to model the time between events in a Poisson process, characterized by a constant average rate of occurrence.

Processing Time

The duration taken to complete a specific task or operation in a manufacturing or computing process.

Replications

The repetition of a study or experiment to verify results and ensure reliability.

Balking

The behavior of customers or participants who decide not to enter a queue or join a process after observing its length or conditions.