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? WACC
=
11)5% Dollars in Thousands NPV this Prob ×
T = 0 t = 1 t = 2 t = 3 State NPV
Prob = 25% $800.0 $800.0 $800.0 $938.1 $234.5
Prob = 50% -$1,000 $520.0 $520.0 $520.0 $259.8 $129.9
Prob = 25% -$200.0 -$200.0 -$200.0 -$1,484.5 -$371.1
Exp) NPV= -$6.7
A) $68.8
B) $72.5
C) $76.3
D) $80.1

Question

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? WACC
=
11)5% Dollars in Thousands NPV this Prob ×
T = 0 t = 1 t = 2 t = 3 State NPV
 Prob = 25% $800.0 $800.0 $800.0 $938.1 $234.5
Prob = 50% -$1,000 $520.0 $520.0 $520.0 $259.8 $129.9
Prob = 25% -$200.0 -$200.0 -$200.0 -$1,484.5 -$371.1
Exp) NPV= -$6.7
A) $68.8 
B) $72.5 
C) $76.3 
D) $80.1

Quizplus · Accepted Answer

The Answer of 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? WACC
=
11)5% Dollars in Thousands NPV this Prob ×
T = 0 t = 1 t = 2 t = 3 State NPV
 Prob = 25% $800.0 $800.0 $800.0 $938.1 $234.5
Prob = 50% -$1,000 $520.0 $520.0 $520.0 $259.8 $129.9
Prob = 25% -$200.0 -$200.0 -$200.0 -$1,484.5 -$371.1
Exp) NPV= -$6.7
A) $68.8 
B) $72.5 
C) $76.3 
D) $80.1

Merritt Company Is Considering a New Project That Has a Cost