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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.

Note: Provide support for rationale.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91167388

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