Aggarwal Enterprises 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.The firm 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, it would have to make a payment to those parties.How much is the option to abandon worth to the firm?
A)$55.08
B)$57.98
C)$61.03
D)$64.08
E)$67.29

Question

Quizplus · Accepted Answer

The value of the option to abandon is calculated based on the potential savings or benefits from ceasing operations compared to continuing the project. The correct value is $61.03, which reflects the net benefit of exercising the abandonment option.

Aggarwal Enterprises Is Considering a New Project That Has a Cost