Steppingstone Incorporated The Z−90 Project Being Considered by Steppingstone Incorporated (SI) Has

question 12

Multiple Choice

Steppingstone Incorporated
The Z−90 project being considered by Steppingstone Incorporated (SI) has an up-front cost of $250,000.The project's subsequent cash flows are critically dependent on whether another of its products, Z−45, becomes an industry standard.There is a 50% chance that the Z−45 will become the industry standard, in which case the Z−90'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 Z−45 will not become the industry standard, in which case the Z−90'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 data for Steppingstone Incorporated (SI) .Now assume that one year from now SI will know if the Z−45 has become the industry standard.Also assume that after receiving the cash flows at t = 1, SI 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) $0
• B) $2,075
• C) $4,067
• D) $8,945
• E) $10,745

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Definitions:

Manufacturing Costs

The aggregate costs associated with the process of producing finished goods, including materials, labor, and overhead.

Direct Materials

Raw materials that are directly traceable to the production of finished goods.

Cost Of Goods Manufactured

The total production cost of goods that were completed during a specific accounting period, including direct materials, direct labor, and manufacturing overhead.

Manufacturing Overhead

All indirect costs associated with manufacturing a product, such as utilities, supplies, and salaries not directly tied to production.