Aggarwal Enterprises Is Considering a New Project That Has a Cost

question 55

Short Answer

Aggarwal 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? $\text { WACC }=11.5 \% \quad \quad \quad \text { Dollars in Thousands } \quad \quad \quad \quad\quad \quad \quad\text { NPV This } \quad \text { Prob. } \times$
$\begin{array}{c}\begin{array}{lll} \text {Prob. \( =20 \% \)}\\ \text {Prob. \( =60 \% \)}\\ \text {Prob. \( =20 \% \)} \end{array}\begin{array}{c}\\t=0 \\\hline-\$ 1,000 \\-\$ 1,000 \\-\$ 1,000\\\\\end{array}\begin{array}{c}\\t=1 \\ \hline\$ 800.0 \\\$ 520.0 \\-\$ 200.0\\\\\end{array}\begin{array}{c}\\t=2 \\\hline\$ 800.0 \\\$ 520.0 \\-\$ 200.0\\\\\end{array}\begin{array}{c}\\t=3 \\\hline \$ 800.0 \\\$ 520.0 \\-\$ 200.0\\\\\end{array}\begin{array}{c}\\\text { State } \\\hline\$ \$ 938.1 \\\$ 259.8 \\-\$ 1,454.5 \\\text { Exp. NPV }=\end{array}\begin{array}{c}\\\mathrm{NPV} \\\hline \$ 187.6 \\\$ 155.9 \\\underline{-\$ 296.9} \\\underline{\underline{ \$ 46.6}} \\\end{array}\end{array}$








a. $\$ 55.0$
b. $\$ 58.0$
c. $\$ 61.0$
d. $\$ 64.1$
e. $\$ 67.3$