A preliminary analysis of a project indicates the following:
|
NPV of Project
|
|
Scenario
|
Year
|
CF mil.
|
Unconditional
Probability
|
PVF
|
CF*Prob.*PVF
|
|
Initial
|
0
|
-50
|
100%
|
1
|
-50.000
|
|
H
|
1
|
25
|
70%
|
0.90909
|
15.909
|
|
L
|
1
|
10
|
30%
|
0.90909
|
2.727
|
|
HH
|
2
|
85
|
49%
|
0.82645
|
34.421
|
|
HL
|
2
|
70
|
21%
|
0.82645
|
12.149
|
|
LH
|
2
|
45
|
12%
|
0.82645
|
4.463
|
|
LL
|
2
|
20
|
18%
|
0.82645
|
2.975
|
|
|
|
|
NPV Af
|
22.645
|
A financial analyst uncovers additional information not incorporated in the calculations above:
In year 1, if scenario equals L, the firm can abandon operations and realize a liquidation value of $30 million from its assets.
Using the DTA approach, answer the following two questions:
- What is the NPV of the project?
- What is the NPV of the option to abandon?