Problem:
A project is worth $15 million today without an abandonment option. Suppose the value of the project is either $20 million one year from today (if product demand is high) or $10 million (if product demand is low). It is possible to sell off the project for $13 million if product demand is low.
Required:
Question: Calculate the value of the abandonment option if the discount rate is 5% per year
- $1.64 million
- $1.90 million
- $1.21 million
- $2.86 million
Note: Please provide full description.