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Acme Co. considering a four-year project that will require an
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# Question : Acme Co. considering a four-year project that will require an : 1819

Acme Co. is considering a four-year project that will require an initial investment of \$9,000. The base-case cash flows for this project are projected to be \$15,000 per year. The best-case cash flows are projected to be \$22,000 per year, and the worst-case cash flows are projected to be -\$1,500 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 13%? \$32,836 \$29,981 \$25,698 \$28,553 Acme 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 \$4,750 (at the end of year 2). The \$4,750 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 -\$1,500 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. \$30,266 \$28,753 \$33,293 \$37,833 What is the value of the option to abandon the project?

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