Abandonment option 9. Isberg Inc. is considering a project which would require a $1.875 million...
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Accounting
Abandonment option
9. Isberg Inc. is considering a project which would require a $1.875 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 55% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $125,000 at the end of each of the next 5 years. There is a 45% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $790,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $125,000 cash flow at t = 1, and the property will be sold netting $1.2 million (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the projects expected NPV if it can be abandoned?
a. -$ 464,875.30
b. +$ 88,397.44
c. +$135,124.70
d. +$224,633.51
e. +$314,142.31
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