A Project Is Worth $12 Million Today Without an Abandonment

question 2

Multiple Choice

A project is worth $12 million today without an abandonment option if the interest rate is 5 percent per year. Suppose the value of the project is either $18 million one year from today (if product demand is high) or $8 million (if product demand is low) . It is possible to sell off the project for $10 million if product demand is low. Calculate the value of the abandonment option if the discount rate is 5 percent per year.

• A)$1.03 million
• B)$0.88 million
• C)$1.90 million
• D)$5.14 million

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Definitions:

Inferences

The act of drawing conclusions based on evidence and reasoning rather than explicit statements.

Information Processing Theorist

An information processing theorist studies how human minds process and understand information, focusing on mechanisms like perception, memory, and problem-solving.

Thinking Stops

describes a cessation or significant interruption in the cognitive process, often due to stress, overwhelming information, or mental health issues, preventing effective problem-solving or decision-making.