Question
In: Accounting
Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to...
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Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now, the company will know whether the new technology is accepted in the market. If the demand for the new filters is high, the present value of the cash flows in one year will be $13.2 million. If the demand is low, the value of the cash flows in one year will be $9.1 million. The value of the project today under these assumptions is $12.1 million and the risk-free rate is 5 percent. Suppose that, in one year, if the demand for the new technology is low, the company can sell the technology for $10.2 million. |
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What is the value of the option to abandon? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) |
Solutions
ekkarill92 answered 2 years agoRelated Solutions
Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to...
Wet for the Summer, Inc., manufactures filters for swimming
pools. The company is deciding whether to implement a new
technology in its pool filters. One year from now, the company will
know whether the new technology is accepted in the market. If the
demand for the new filters is high, the present value of the cash
flows in one year will be $29 million. If the demand is low, the
value of the cash flows in one year will be...
Fincal Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This...
Fincal Inc. manufactures financial calculators. The company is
deciding whether to introduce a new calculator. This calculator
will sell for $120. The company feels that sales will be 13,000,
13,000, 14,000, 14,000, 15,000 and 12,500 units per year for the
next 6 years. Variable costs will be 30% of sales, and fixed costs
are $200,000 per year. The firm hired a marketing team to analyze
the viability of the product and the marketing analysis cost
$2,000,000. The company plans to...
Finco Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This...
Finco Inc. manufactures financial calculators. The company is
deciding whether to introduce a new calculator. This calculator
will sell for $100. The company feels that sales will be 12,500,
13,000, 14,000, 13,200, and 12,500 units per year for the next 5
years. Variable costs will be 25% of sales, and fixed costs are
$300,000 per year. The firm hired a marketing team to analyze the
viability of the product and the marketing analysis cost
$1,500,000. The company plans to use...
Finco Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This...
Finco Inc. manufactures financial calculators. The company is
deciding whether to introduce a new calculator. This calculator
will sell for $100. The company feels that sales will be 12,500,
13,000, 14,000, 13,200, and 12,500 units per year for the next 5
years. Variable costs will be 25% of sales, and fixed costs are
$300,000 per year. The firm hired a marketing team to analyze the
viability of the product and the marketing analysis cost
$1,500,000. The company plans to use...
Finco Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This...
Finco Inc. manufactures financial calculators. The company is
deciding whether to introduce a new calculator. This calculator
will sell for $100. The company feels that sales will be 12,500,
13,000, 14,000, 13,200, and 12,500 units per year for the next 5
years. Variable costs will be 25% of sales, and fixed costs are
$300,000 per year. The firm hired a marketing team to analyze the
viability of the product and the marketing analysis cost
$1,500,000. The company plans to use...
Finco Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This...
Finco Inc. manufactures financial calculators. The company is
deciding whether to introduce a new calculator. This calculator
will sell for $85. The company feels that sales will be 13,500,
13,900, 14,000, 14,200, and 13,000 units per year for the next 5
years. Variable costs will be 30% of sales, and fixed costs are
$250,000 per year. The firm hired a marketing team to analyze the
viability of the product and the marketing analysis cost
$1,000,000. The company plans to use...
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany...
J. Smythe, Inc., manufactures fine furniture. The company is
deciding whether to introduce a new mahogany dining room table set.
The set will sell for $6,050, including a set of eight chairs. The
company feels that sales will be 2,900, 3,050, 3,600, 3,450, and
3,200 sets per year for the next five years, respectively. Variable
costs will amount to 45 percent of sales and fixed costs are
$1,920,000 per year. The new tables will require inventory
amounting to 10 percent...
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany...
J. Smythe, Inc., manufactures fine furniture. The company is
deciding whether to introduce a new mahogany dining room table set.
The set will sell for $8,000, including a set of eight chairs. The
company feels that sales will be 2,450, 2,600, 3,150, 3,000, and
2,750 sets per year for the next five years, respectively. Variable
costs will amount to 47 percent of sales and fixed costs are $1.98
million per year. The new dining room table sets will require
inventory...
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany...
J. Smythe, Inc., manufactures fine furniture. The company is
deciding whether to introduce a new mahogany dining room table set.
The set will sell for $6,150, including a set of eight chairs. The
company feels that sales will be 3,000, 3,150, 3,700, 3,550, and
3,300 sets per year for the next five years, respectively. Variable
costs will amount to 46 percent of sales and fixed costs are
$1,930,000 per year. The new tables will require inventory
amounting to 14 percent...
Aquafloat Corporation manufactures rafts for use in swimming pools. The standard cost for material and labor...
Aquafloat Corporation manufactures rafts for use in swimming
pools. The standard cost for material and labor is $89.20 per raft.
This includes 8 kilograms of direct material at a standard cost of
$5.00 per kilogram, and 6 hours of direct labor at $8.20 per hour.
The following data pertain to November: Work-in-process inventory
on November 1: none. Work-in-process inventory on November 30: 800
units (75 percent complete as to labor; material is issued at the
beginning of processing). Units completed:...
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