cash flow of year 3 in any scenario or state of the economy, then the ex-
pected net present value calculation of the new building should be recalcu-
lated. The abandonment value of $70 million exceeds the expected present
value of cash flow for year 3 in the depression ($66.717 million) and reces-
sion ($67.468 million) modes. (See Table 4.6.)
The recalculated expected net present value of the new building is
shown in Table 4.7. The expected net present value is increased by $14.31
60 DEBT, EQUITY, FINANCIAL STRUCTURE, AND THE INVESTMENT DECISION
TABLE 4.6 Calculation of Expected Cash Value in Year 3
State of CF PVIF PV Year 3 Scenario
Economy Year 3 Year 3 Prob3 CF3 Total ($mm)
Depression 1 0.751 0.20 0.150
25 0.751 0.50 9.391
30 0.751 0.25 5.635
40 0.751 0.05 1.503
1 0.751 0.20 0.150
25 0.751 0.50 9.391
30 0.751 0.25 5.635
40 0.751 0.05 1.503
1 0.751 0.20 0.150
25 0.751 0.50 9.391
30 0.751 0.25 5.635
40 0.751 0.05 1.503
1 0.751 0.20 0.150
25 0.751 0.50 9.391
30 0.751 0.25 5.635
40 0.751 0.05 1.503 $66.717
Recession 3 0.751 0.15 0.338
20 0.751 0.45 6.762
30 0.751 0.30 6.762
40 0.751 0.10 3.005
3 0.751 0.15 0.338
20 0.751 0.45 6.762
30 0.751 0.30 6.762
40 0.751 0.10 3.005
3 0.751 0.15 0.338
20 0.751 0.45 6.762
30 0.751 0.30 6.762
40 0.751 0.10 3.005
3 0.751 0.15 0.338
20 0.751 0.45 6.762
30 0.751 0.30 6.762
40 0.751 0.10 3.005 $67.468