Merritt Company Is Considering a New Project That Has a Cost

question 23

Multiple Choice

Merritt Company 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.Merritt 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,Merritt would have to make a payment to those parties.How much is the option to abandon worth (in thousands) to Merritt? $\begin{array}{l}\begin{array}{lll}\mathrm{WACC}=11.5 \%& \text { Dollars in Thousands }\\&t=10\\\hline \text { Prob }=25 \% & \\\text { Prob }=50 \% & -\$ 1,000 \\\text { Prob }=25 \%\end{array}\begin{array}{lll} \text { NPV this } &\text { Prob } \times\\t=1 & t=2 & t=3 & \text { State } & \text { NPV } \\\hline \$ 800.0 & \$ 800.0 & \$ 800.0 & \$ 938.1 & \$ 234.5 \\\$ 520.0 & \$ 520.0 & \$ 520.0 & \$ 259.8 & \$ 129.9 \\-\$ 200.0 & -\$ 200.0 & -200.0 & -\$ 1,484.5&-\$ 371.1\end{array}\end{array}$

$\begin{array}{r}\text { Exp }-\$ 6.7 \\\text { NPV }\end{array}$

• A)$68.8
• B)$72.5
• C)$76.3
• D)$80.1

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Definitions:

Variable-Ratio

A reinforcement schedule where a response is reinforced after an unpredictable number of responses, leading to high and steady response rates.

Fixed-Interval

A schedule of reinforcement where rewards are delivered at constant intervals of time, contingent on the first response after the interval has passed.

Variable-Interval

A reinforcement schedule that reinforces a response at unpredictable time intervals, leading to steady, moderate response rates.

Reinforcement

In behavioral psychology, it refers to any stimulus which strengthens or increases the probability of a specific response.