A Project Is Worth $15 Million Today Without an Abandonment

question 29

Multiple Choice

A project is worth $15 million today without an abandonment option.Suppose the value of the project is either $20 million one year from today (if product demand is high) or $10 million (if product demand is low) .It is possible to sell off the project for $13 million if product demand is low.Calculate the value of the abandonment option if the discount rate is 5% per year.

• A)$1.21 million
• B)$2.86 million
• C)$1.90 million
• D)$1.64 million

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Definitions:

Debt Ratio

Debt divided by total assets. A financial ratio measuring the degree to which the firm uses borrowed money.

Total Debt

The sum of all liabilities, both current and long-term, that a company owes to external parties.

Net Worth

The total assets minus total liabilities of an individual or company, indicating financial health and stability.

Operating Income

Earnings before interest and taxes (EBIT), representing the profit a company makes after paying for variable costs of production but before paying interest or tax.