A preliminary analysis of a project indicates the following: NPV of Project Scen
ID: 2756433 • Letter: A
Question
A preliminary analysis of a project indicates the following:
NPV of Project
Scenario
Year
CF mil.
Unconditional
Probability
PVF
CF*Prob.*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 à
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?
NPV of Project
Scenario
Year
CF mil.
Unconditional
Probability
PVF
CF*Prob.*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 à
22.645
Explanation / Answer
Scenario HH 70248250.00 Scenario H Scenario HL 22727250.00 57851500.00 Investment -5,00,00,000.00 Scenario LH Scenario L 37190250.00 9090900.00 Scenario LL 16529000.00 NPV of the Project = Scenario H + Scenario HH - Investment 4,29,75,500.00 NPV of the option to abandon the project = Scenario L + $30,000,000.00*0.82645 - Investment -1,61,15,600.00
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