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:

Transcription

The process by which the genetic information in a strand of DNA is copied into a new molecule of messenger RNA (mRNA).

mRNA

Messenger RNA, a type of RNA that is transcribed from DNA and carries instructions for synthesizing proteins to the ribosomes.

Ribosome

Ribosomes are molecular machines within cells that synthesize proteins by translating messenger RNA into polypeptide chains, essential for all cellular functions.

Polypeptide Chain

A long, continuous, and unbranched chain of amino acids linked by peptide bonds that forms part of the structure of proteins.