OklahomaOklahoma Instruments (OI) Is Considering a Project Called F-200 That

question 10

Multiple Choice

OklahomaOklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.
-Refer to Scenario: Oklahoma.Now assume that 1 year from now OI will know if the F-100 has become the industry standard.Also assume that after receiving the cash flows at t = 1,OI has the option to abandon the project,in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1.Assuming that the cost of capital remains at 12%,what is the estimated value of the abandonment option?

• A)$2,075
• B)$4,067
• C)$8,945
• D)$10,745

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Definitions:

Second-Generation

Often refers to products or individuals that represent an evolved or improved version from their original form.

Antipsychotic Drugs

Medications primarily used to manage psychosis, including delusions, hallucinations, and disorders such as schizophrenia.

Tardive Dyskinesia

A neurological disorder characterized by involuntary movements, especially of the lower face and jaw, often resulting from long-term use of antipsychotic drugs.

Antipsychotic Drugs

Medications used to manage psychosis, including delusions, hallucinations, or disordered thought, typically in conditions like schizophrenia.