# Finance Assignment | Professional Writing

Shan 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 \$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 13%? \$19,981 \$26,225 \$23,727 \$24,976 Shan 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.

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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. \$33,035 \$26,428 \$34,356 \$23,785 What is the value of the option to abandon the project?

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