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. $\$ 67.3$

Differentiate between types of unemployment and their relation to the economy's potential output.

Analyze the impact of supply shocks on the aggregate supply curve.

Grasp the effects of expansionary and recessionary gaps on the economy.

Explain the role of price levels in determining short-run economic expansion or contraction.

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Definitions:

Social Relationships

Connections or interactions between individuals in a society, based on various factors such as friendship, kinship, common interests, or professional affiliations.

Business Deals

Agreements or transactions between parties for the exchange of goods, services, or information in a commercial context.

Yemeni Culture

The rich and diverse cultural heritage of Yemen, characterized by traditional music, dance, attire, and social norms deeply rooted in its history and Islamic beliefs.

Left Hand

Often used metaphorically to represent skills or tasks that are less dominant or secondary to one's main abilities.