um Assignment 12-Cash Re × yt-MindTap . Cengage lean (--) ? lii Secure! http://n

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um Assignment 12-Cash Re × yt-MindTap . Cengage lean (--) ? lii Secure! http://ng.cengage.com/static/nbu I?deploymentld-55165118170069013380450101 MINDTAP Assignment 12-Cash Flow Estimation and Risk Analysis Back to Assignment Attempts: 8. Abandonment options Keep the Highest: 13 Galbraith Co. is considering a four-year project that ill require an initial investment of $5,000. The base-case cash flows for this project are projected to be $15,000 per year. The best-case cash flows are projected to be $22,000 per year, and the worst-case cash flows are projected to be-$1,500 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 2S% probability of the project generating the worst case cash flows What would be the expected net present value (PV) of this project it the project's cost or capital is i% O $34,169 O $29,044 O $32,461 O $30,752 Galbraith generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company vill receive a one-time net cash infow 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 -$1,500 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 now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up

Explanation / Answer

a Probable cash flows by the project would be as follows 15000*0.50 + 22000*0.25 - 1500*0.25 $12,625 Year Cash flow Discount factor @ 11% 0 -5000 1.0000    (5,000.00) 1 12625 0.9009    11,373.87 2 12625 0.8116    10,246.73 3 12625 0.7312      9,231.29 4 12625 0.6587      8,316.48 34169

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