Merritt Company Is Considering a New Project That Has a Cost

question 59

Multiple Choice

Merritt Company 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. Merritt 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, Merritt would have to make a payment to those parties. How much is the option to abandon worth (in thousands) to Merritt? WACC
=
11) 5% Dollars in Thousands NPV this Prob ×
T = 0 t = 1 t = 2 t = 3 State NPV
Prob = 25% $800.0 $800.0 $800.0 $938.1 $234.5
Prob = 50% -$1,000 $520.0 $520.0 $520.0 $259.8 $129.9
Prob = 25% -$200.0 -$200.0 -$200.0 -$1,484.5 -$371.1
Exp) NPV= -$6.7

• A) $68.8
• B) $72.5
• C) $76.3
• D) $80.1

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Definitions:

Owned No Slaves

Pertains to individuals or entities that did not engage in the ownership of slaves, particularly relevant in historical contexts where slavery was institutionalized.

Emancipation

refers to the process of being freed from legal, social, or political restrictions; historically associated with the freeing of slaves.

Kinship Ties

The relationships among individuals brought together through blood, marriage, or adoption, forming the basis of family connections and social networks.

Legitimize

To make something legal, acceptable, or official.