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What is the project expected NPV if it can be abandoned

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    Assignment ID: FG133134416

    Question – Verbrugge Inc. is considering a project which would require a $2.25 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 60% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $137,500 at the end of each of the next 5 years. There is a 40% probability that the tax will not pass. If the tax does not pass, the factory will produce after- tax cash flows of $1,027,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $137,500 cash flow at t = 1, and the property will be sold netting $1.5 million (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project’s expected NPV if it can be abandoned?

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