Carlson Inc

question 26

Multiple Choice

Carlson Inc.is evaluating a project in India that would require a $5.8 million investment today (t = 0) .The after-tax cash flows would depend on whether India imposes a new property tax.There is a 50-50 chance that the tax will pass,in which case the project will produce after-tax cash flows of $1,350,000 at the end of each of the next 5 years.If the tax doesn't pass,the after-tax cash flows will be $1,800,000 for 5 years.The project has a WACC of 10.4%.The firm would have the option to abandon the project 1 year from now,and if it is abandoned,the firm would receive the expected $1.35 million cash flow at t = 1 and would also sell the property for $4.45 million at t = 1.If the project is abandoned,the company would receive no further cash inflows from it.What is the value (in thousands) of this abandonment option? Do not round intermediate calculations.

• A) $99
• B) $70
• C) $94
• D) $108
• E) $89