An Abandonment Option Will Have an Upfront Cost of $1

question 36

Multiple Choice

An abandonment option will have an upfront cost of $1.0 million.  There is a 40% chance that the abandonment option would be used, in which case cash outflows of $800,000 in Year 4, $1,400,000 in Year 5 and $1,200,000 in Year 6 will be avoided.  If the discount rate is 7.0%, should the abandonment option be exercised?

• A)Yes because its impact on expected NPV about $101,000.
• B)No because its impact on expected NPV is about ($37,000).
• C)Yes because its impact on expected NPV is about $47, 600.
• D)No because its impact on expected NPV is about ($23,700).

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Definitions:

Cognitive-Behavioral Therapy

A therapy that combines cognitive and behavioral strategies to treat various mental disorders, focusing on altering negative thoughts, beliefs, and behaviors.

Randomized Clinical Trials

A scientific study design that assigns participants randomly to either the treatment group or the control group to evaluate the effectiveness of medical interventions.

Equally Effective

A term used to describe treatments or interventions that achieve similar outcomes or results in addressing a problem.

Dysfunctional Attitudes

Negative, self-defeating thoughts or beliefs that contribute to and exacerbate psychological disorders, especially depression and anxiety.