Post by andrew on Mar 11, 2021 10:27:53 GMT
Hi, I'm struggling to work the calculation to this question from P2 - I know the answer is $10,800, but no one can give me the calculation behind it.
Any help would be appreciated. Thanks
L is considering investing in a machine that has an expected useful life of three years. The machine will reduce L's production overheads but the amount of the annual saving cannot be determined with certainty at the project appraisal stage.
The annual savings will be $10,000, $20,000 or $30,000, each of which is regarded as equally likely. The savings generated in the first year will continue for the second and third years.
The machine will cost $35,000 to buy and will have a zero scrap value. L requires a 10% re-turn on its capital investments.
In order to encourage L's board to buy the machine, the vendor has offered to take the ma-chine back at the end of year 1 and to refund $20,000 of the initial investment if it does so.
What is the value of the abandonment option offered by the vendor?
Possible Answers:
$6,340
$10,800
$36,360
$18,180
Any help would be appreciated. Thanks
L is considering investing in a machine that has an expected useful life of three years. The machine will reduce L's production overheads but the amount of the annual saving cannot be determined with certainty at the project appraisal stage.
The annual savings will be $10,000, $20,000 or $30,000, each of which is regarded as equally likely. The savings generated in the first year will continue for the second and third years.
The machine will cost $35,000 to buy and will have a zero scrap value. L requires a 10% re-turn on its capital investments.
In order to encourage L's board to buy the machine, the vendor has offered to take the ma-chine back at the end of year 1 and to refund $20,000 of the initial investment if it does so.
What is the value of the abandonment option offered by the vendor?
Possible Answers:
$6,340
$10,800
$36,360
$18,180
