A Project Is Worth $15 Million Today Without an Abandonment

question 7

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 percent per year.

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

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Definitions:

Opportunity Cost

The expense incurred by not choosing the second-best option in any decision-making process.

Higher Prices

An increase in the cost of goods or services in the market.

Quantities

The amount or number of a material or item present or available.

Peanut Butter

Peanut butter is a food paste or spread made from ground dry roasted peanuts, often enriched with various ingredients like salt, sweeteners, or emulsifiers.