Merritt Company is considering a new project that has a cost of $1,000,000,and the CFO set up the following simple decision tree to show its three most likely scenarios.Merritt could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so,but to obtain this abandonment option,Merritt would have to make a payment to those parties.How much is the option to abandon worth (in thousands) to Merritt?

\begin{array}{l}\begin{array}{lll}\mathrm{WACC}=11.5 \%& \text { Dollars in Thousands }\\&t=10\\\hline \text { Prob }=25 \% & \\\text { Prob }=50 \% & -\$ 1,000 \\\text { Prob }=25 \%\end{array}\begin{array}{lll} \text { NPV this } &\text { Prob } \times\\t=1 & t=2 & t=3 & \text { State } & \text { NPV } \\\hline \$ 800.0 & \$ 800.0 & \$ 800.0 & \$ 938.1 & \$ 234.5 \\\$ 520.0 & \$ 520.0 & \$ 520.0 & \$ 259.8 & \$ 129.9 \\-\$ 200.0 & -\$ 200.0 & -200.0 & -\$ 1,484.5&-\$ 371.1\end{array}\end{array}

\begin{array}{r}\text { Exp }-\$ 6.7 \\\text { NPV }\end{array}

A)$68.8
B)$72.5
C)$76.3
D)$80.1

Suppose Walker Publishing Company Is Considering Bringing Out a New

True/False

Correct Answer:VerifiedUnlock this answer nowGet Access to more Verified Answers free of chargeAccess For Free

Correct Answer:
Verified
Unlock this answer now
Get Access to more Verified Answers free of charge