What is the npv of the option to abandon

Assignment Help Accounting Basics

Reference no: EM131015400

A preliminary analysis of a project indicates the following:

NPV of Project
*Scenario*	*Year*	*CF mil.*	*Unconditional* *Probability*	*PVF*	**CFProb.PVF**
Initial	0	-50	100%	1	-50.000
H	1	25	70%	0.90909	15.909
L	1	10	30%	0.90909	2.727
HH	2	85	49%	0.82645	34.421
HL	2	70	21%	0.82645	12.149
LH	2	45	12%	0.82645	4.463
LL	2	20	18%	0.82645	2.975
				NPV Af	22.645

A financial analyst uncovers additional information not incorporated in the calculations above:

In year 1, if scenario equals L, the firm can abandon operations and realize a liquidation value of $30 million from its assets.

Using the DTA approach, answer the following two questions:

What is the NPV of the project?
What is the NPV of the option to abandon?

Reference no: EM131015400

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