You are considering a 10-year investment project. So the future cash flows after abandonment should disappear.) … Get solutions Get solutions Get solutions done loading Looking for the textbook? Also, once you abandon the project, the actual cash flows for future years are 0. Thus in year 5, for example, you abandon only if the sum of future expected NPVs is less than the year 5 abandonment value and the project has not yet been abandoned. How much would you pay for the abandonment option? (Hint: You can abandon a project at most once. Estimate the mean and standard deviation of the project with the abandonment option. This has an NPV of less than $6200, so you should abandon the project and collect $6200 at the end of year 1. Then at the end of year 1, you expect cash flow for each remaining year to be $400. For example, suppose that year 1 cash flow is $400. At the end of each year you can abandon the project for the value given in the file P17_42.xlsx. Now assume that the project has an abandonment option. Assume that cash flows are discounted at a rate of 10% per year.b. Estimate the mean and standard deviation of the NPV of this project. Also, at the end of year 1, your best guess is that each later year’s expected cash flow will be $1200.a. Then year 2 cash flow is normal with mean $1200 and standard deviation $100. For example, suppose that the actual cash flow in year 1 is $1200. Suppose, however, that each year’s cash flow is normally distributed with mean equal to last year’s actual cash flow and standard deviation $100. At present, the expected cash flow each year is $1000.
This problem has been solved: Solutions for Chapter 17 Problem 42P: You are considering a 10-year investment project.
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