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Herman Co$.$ is considering a four$-$year project that will require an initial investment of $$12,000.$ The base$-$case cash flows for this project are projected to be $$12,000$ per year. The best$-$case cash flows are projected to be $$20,000$ per year, and the worst$-$case cash flows are projected to be $-$$$1,000$ 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 $12\%?$

$$ $$23,750$

$$18,587$

$$17,554$

$$20,652$

Herman 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 $-$$$1,000$ 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.

$$ $$22,134$

$$ $$21,027$

$$27,668$

$$23,241$

what is the value of the option to abandon the project?

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