Herman Co. is considering a four-year project that will require an initial investment of $7,000. The...

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Herman Co. is considering a four-year project that will requirean initial investment of $7,000. The base-case cash flows for thisproject are projected to be $14,000 per year. The best-case cashflows are projected to be $26,000 per year, and the worst-case cashflows are projected to be –$4,500 per year. The company’s analystshave estimated that there is a 50% probability that the projectwill generate the base-case cash flows. The analysts also thinkthat there is a 25% probability of the project generating thebest-case cash flows and a 25% probability of the projectgenerating the worst-case cash flows.
What would be the expected net present value (NPV) of thisproject if the project’s cost of capital is 11%?
$26,684
$25,114
$29,823
$31,393
Herman now wants to take into account its ability to abandon theproject at the end of year 2 if the project ends up generating theworst-case scenario cash flows. If it decides to abandon theproject at the end of year 2, the company will receive a one-timenet cash inflow of $4,750 (at the end of year 2). The $4,750 thecompany receives at the end of year 2 is the difference between thecash the company receives from selling off the project’s assets andthe company’s –$4,500 cash outflow from operations. Additionally,if it abandons the project, the company will have no cash flows inyears 3 and 4 of the project.
Using the information in the preceding problem, find theexpected NPV of this project when taking the abandonment optioninto account.
$31,350
$34,833
$33,091
$38,316
What is the value of the option to abandon theproject?

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Herman Co. is considering a four-year project that will requirean initial investment of $7,000. The base-case cash flows for thisproject are projected to be $14,000 per year. The best-case cashflows are projected to be $26,000 per year, and the worst-case cashflows are projected to be –$4,500 per year. The company’s analystshave estimated that there is a 50% probability that the projectwill generate the base-case cash flows. The analysts also thinkthat there is a 25% probability of the project generating thebest-case cash flows and a 25% probability of the projectgenerating the worst-case cash flows.What would be the expected net present value (NPV) of thisproject if the project’s cost of capital is 11%?$26,684$25,114$29,823$31,393Herman now wants to take into account its ability to abandon theproject at the end of year 2 if the project ends up generating theworst-case scenario cash flows. If it decides to abandon theproject at the end of year 2, the company will receive a one-timenet cash inflow of $4,750 (at the end of year 2). The $4,750 thecompany receives at the end of year 2 is the difference between thecash the company receives from selling off the project’s assets andthe company’s –$4,500 cash outflow from operations. Additionally,if it abandons the project, the company will have no cash flows inyears 3 and 4 of the project.Using the information in the preceding problem, find theexpected NPV of this project when taking the abandonment optioninto account.$31,350$34,833$33,091$38,316What is the value of the option to abandon theproject?