An abandonment option will have an upfront cost of $1.0 million. There is a 40% chance that the abandonment option would be used, in which case cash outflows of $800,000 in Year 4, $1,400,000 in Year 5 and $1,200,000 in Year 6 will be avoided. If the discount rate is 7.0%, should the abandonment option be exercised?
A)Yes because its impact on expected NPV about $101,000.
B)No because its impact on expected NPV is about ($37,000).
C)Yes because its impact on expected NPV is about $47, 600.
D)No because its impact on expected NPV is about ($23,700).

Question

An abandonment option will have an upfront cost of $1.0 million.  There is a 40% chance that the abandonment option would be used, in which case cash outflows of $800,000 in Year 4, $1,400,000 in Year 5 and $1,200,000 in Year 6 will be avoided.  If the discount rate is 7.0%, should the abandonment option be exercised?
A)Yes because its impact on expected NPV about $101,000.
B)No because its impact on expected NPV is about ($37,000).
C)Yes because its impact on expected NPV is about $47, 600.
D)No because its impact on expected NPV is about ($23,700).

Quizplus · Accepted Answer

The Answer of An abandonment option will have an upfront cost of $1.0 million.  There is a 40% chance that the abandonment option would be used, in which case cash outflows of $800,000 in Year 4, $1,400,000 in Year 5 and $1,200,000 in Year 6 will be avoided.  If the discount rate is 7.0%, should the abandonment option be exercised?
A)Yes because its impact on expected NPV about $101,000.
B)No because its impact on expected NPV is about ($37,000).
C)Yes because its impact on expected NPV is about $47, 600.
D)No because its impact on expected NPV is about ($23,700).

An Abandonment Option Will Have an Upfront Cost of $1