Carlson Inc. is evaluating a project in India that would require a $6.2 million
ID: 2714857 • Letter: C
Question
Carlson Inc. is evaluating a project in India that would require a $6.2 million investment today (t = 0). The after-tax cash flows would depend on whether India imposes a new property tax. There is a 50-50 chance that the tax will pass, in which case the project will produce after-tax cash flows of $1,350,000 at the end of each of the next 5 years. If the tax doesn't pass, the after-tax cash flows will be $2,000,000 for 5 years. The project has a WACC of 12.0%. The firm would have the option to abandon the project 1 year from now, and if it is abandoned, the firm would receive the expected $1.35 million cash flow at t = 1 and would also sell the property for $4.75 million at t = 1. If the project is abandoned, the company would receive no further cash inflows from it. What is the value (in thousands) of this abandonment option?
$104 $115 $128 $141 $155
Explanation / Answer
Ans)
Cost Of project 6.2 Life 5 years depriciation 6.2/5 1.24 Inflow 1.35 Inflow 2.59 Sale of property 4.75 Total Inflow 4.75+2.59 7.34 PVF At T=1 12% 0.893 PV of Inflow 6.55462 Cost of Project 6.2 NPV 0.35