The NPV of a Project Based on Forecasted Cash Flows

question 70

Essay

The NPV of a project based on forecasted cash flows is $1,000,000. There is a 40% probability that cash flows from the project will be seriously reduced because competitors will enter the market. In this case, if the company did nothing, the NPV would be ($500,000). The project can also be abandoned after 2 years and NPV will be ($100,000). What is the expected NPV of the project when the option to abandon is considered. Should the projected be accepted?

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