Scenario analysis for a proposed new project has resulted in the following: An abandonment option would change the NPV in the worst case to ($500). The project's expected NPV if the abandonment option is included is:
A)$190.
B)($290).
C)$290.
D)None of the above

Question

Scenario analysis for a proposed new project has resulted in the following:  An abandonment option would change the NPV in the worst case to ($500). The project's expected NPV if the abandonment option is included is:
A)$190. 
B)($290). 
C)$290. 
D)None of the above

Quizplus · Accepted Answer

The fact that the abandonment option would change the NPV in the worst case to ($500) means that without the option, the worst case scenario must be better than ($500). Therefore, the expected NPV without the abandonment option must be higher than ($500). Since the abandonment option only serves to increase the NPV, it follows that the expected NPV if the abandonment option is included must be even higher. Therefore, the correct answer is C) $290.

Scenario Analysis for a Proposed New Project Has Resulted in the Following