ACF Manufacturing is considering a 12-year opportunity to invest in a new production facility. The company has estimated that the project will require an initial investment of $70 million and will generate after-tax free cash flows of $11.75 million per year over the twelve-year life of the project. You further estimate that if things go badly in the first two years of the project, you will be able to abandon the project and salvage the equipment and facilities for $52 million (net of taxes). The decision to abandon must be made at time 2 or not at all. If the volatility of returns from the project is 25%, the risk-free interest rate is 3.5%, and the project required return is 14%, what is the value of the project including the option to abandon? Use the Black-Scholes calculator to solve this problem.
ACF Manufacturing is considering a 12-year opportunity to invest in a new production facility. The company has estimated that the project will require an initial investment of $70 million and will generate after-tax free cash flows of $11.75 million per year over the twelve-year life of the project. You further estimate that if things go badly in the first two years of the project, you will be able to abandon the project and salvage the equipment and facilities for $52 million (net of taxes). The decision to abandon must be made at time 2 or not at all. If the volatility of returns from the project is 25%, the risk-free interest rate is 3.5%, and the project required return is 14%, what is the value of the project including the option to abandon? Use the Black-Scholes calculator to solve this problem.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 2PB: Markoff Products is considering two competing projects, but only one will be selected. Project A...
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