A firm has just accepted a project with a npv of 3991

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62. A firm has just accepted a project with a NPV of $39.91 million. The project has the following cash flows (in millions): Time 0 1 2 3 4 5 6 Cash flow –50 20 30 30 20 20 10 Abandonment N.A. 40 35 30 20 10 N.A. The cost of capital for this project is 13%. We are trying to determine if we should abandon the project at t = 2. Which of the below statements (if any) is true? a. No, the value of the remaining cash flows is over twice as great as the abandonment value. b. No, the value of the remaining cash flows is $80 million and that is greater than $35 million. c. Yes, we should abandon because we will get $35 million while the cash flow for the next period is only $30 million. d. none of these [ ANSWER: For t = 2, the value of the remaining cash flows is: FV 2 = $30 / (1.13) 1 + $20 / (1.13) 2 + $20 / (1.13) 3 + $10 / (1.13) 4 = $62.21 million . This is greater than the $35 abandonment value so the project would not be abandoned at t = 2 but not for the reasons stated in “a” or “b” which are incorrect.] c 63. A firm has just accepted the project with a positive NPV. The project has the following cash flows (in millions): Time 0 1 2 3 4 5 6 Cash flow –70 20 30 30 20 20 5 Abandonment N.A. 40 35 40 20 10 N.A. If the cost of capital for this project is 13%, should the project be abandoned at t = 3? $40 million. remaining cash flows are less than $37 million. [ $5 / (1.13) 3 = $36.82 million . This is less than the $40 abandonment value so the project would be abandoned at t = 3.] b 64. A firm has just accepted the project with a NPV of $19.91 million. The project has the following cash flows (in millions): Time 0 1 2 3 4 5 6 Cash flow –70 20 30 30 20 20 10 Abandonment N.A. 40 35 30 20 10 N.A.
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If the cost of capital for this project is 13%, should the project be abandoned at t = 4? [ = $25.53 million . This is $5.53 million greater than the $20 abandonment value so the project
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