Now Assume That the Project Has an Abandonment Option

question 12

Essay

Now assume that the project has an abandonment option.At the end of each year you can abandon the project for the values given below: For example,suppose that year 1 cash flow is $400.Then at the end of year 1,you expect cash flow for each remaining year to be $400.This has an NPV of less than $6200,so you should abandon the project and collect $6200 at the end of year 1.Estimate the mean and standard deviation of the project with the abandonment option.How much would you pay for the abandonment option? (Hint: You can abandon a project at most once.Thus in year 5,for example,you abandon only if the sum of future expected NPVs is less than the year 5 abandonment value and the project has not yet been abandoned.Also,once you abandon the project,the actual cash flows for future years will 0.So the future cash flows after abandonment should disappear.)

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Definitions:

Ethics Competency

An individual's or organization's capability to recognize ethical dilemmas, make informed ethical decisions, and act in an ethically responsible manner.

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are structured plans implemented by organizations to ensure adherence to legal statutes, regulations, and internal policies.

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The explicitly stated moral rules and principles that govern behaviors within an organization or society.

Ethical Misconduct

Behaviors or actions that go against moral principles and professional standards.