Please help with all Galbraith Co. is considering a four-year project that will

Question

Please help with all

Galbraith Co. is considering a four-year project that will require an initial investment of $7,000. The base-case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $26,000 per year, and the worst-case cash flows are projected to be -$4,500 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project's cost of capital is 10%? Galbraith now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow of $3,500 (at the end of year 2). The $3,500 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the project's assets and the company's -$4,500 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project. Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account. $37.269 $46,142 $35.494 $33,719 What is the value of the option to abandon the project?

Explanation / Answer

Question 1:

The cash flow for each year is calculated as 0.5*14000 + 0.25*26000 + 0.25*-4500 = 12,375

The NPV is calculated as follows:

Hence answer is : $32,227 (Option D)

Year Cash flow Discounted Cash flow 0 -7000 -7000 1 12375 11250 2 12375 10227.2727 3 12375 9297.52066 4 12375 8452.29151 NPV $ 32,227.08

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