Westover Farms has developed a new strain of feed corn which is expected to produce more ears per acre. The company is now analyzing the value of actually planting and harvesting their ﬁrst
Crops of this strain. The net present value (NPV) of the project is $740,000. This value was
Computed assuming that the project will last through ﬁve growing seasons. If Westover would
Include an option to abandon in the NPV computation, the NPV would:
A) Not be affected.
B) Would decrease over the life of the project.
C) Would decrease, but only for the ﬁrst year of the project.
D) Increase, at least in the early years of the project.
E) Increase, but only if the project continues for the entire ﬁve years.

Question

Quizplus · Accepted Answer

Including an option to abandon would increase the NPV, at least in the early years of the project. This is because having an option to abandon provides flexibility and reduces the risk of losses in case the new strain of feed corn does not perform as expected. The option to abandon would act as an insurance policy, allowing the company to cut losses and exit the project if necessary, thereby increasing the expected payoff of the project. However, the effect of the option to abandon on the NPV would depend on the specifics of the option, such as the exercise price and the timing of abandonment.

Westover Farms Has Developed a New Strain of Feed Corn