An Abandonment Option Will Have an Upfront Cost of $1

question 36

Multiple Choice

An abandonment option will have an upfront cost of $1.0 million.  There is a 40% chance that the abandonment option would be used, in which case cash outflows of $800,000 in Year 4, $1,400,000 in Year 5 and $1,200,000 in Year 6 will be avoided.  If the discount rate is 7.0%, should the abandonment option be exercised?

• A)Yes because its impact on expected NPV about $101,000.
• B)No because its impact on expected NPV is about ($37,000).
• C)Yes because its impact on expected NPV is about $47, 600.
• D)No because its impact on expected NPV is about ($23,700).

Understand the role and impact of technology in enhancing document presentation and organization.

Recognize strategies for adapting content for a global audience, including localization.

Identify the components and structure of a compelling proposal, including the variations for solicited and unsolicited proposals.

Comprehend the importance of summarizing key points and recommendations in closing a proposal.

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Definitions:

Escalator Clause

is a contract provision that allows for an automatic adjustment in prices or wages based on fluctuations in certain economic indicators.

Costs Change

Alterations in the financial expenditures associated with producing or obtaining goods and services.

Indirect Costs

Costs that are not directly accountable to a cost object, such as overhead and administrative expenses.

Production Plant

A facility where goods are manufactured or assembled, using labor and machinery.