million by the presence of the abandonment option. The project should be
abandoned after year 2. The presence of an abandonment value of $70
million enhances the net present value of the project by $14.31 million be-
cause the abandonment value exceeds the expected present value of year 3
cash flows in the depression and recession scenarios. The abandonment
analysis may not be complete until one calculates the present value of the
cash flow forgone by abandoning the project. The present value of the
abandoned cash flow is shown in Table 4.8, and is $40.192 million.
TABLE 4.6 (Continued)
State of CF PVIF PV Year 3 Scenario
Economy Year 3 Year 3 Prob3 CF3 Total ($mm)
Normal 20 0.751 0.05 0.751
30 0.751 0.33 7.438
60 0.751 0.61 27.498
90 0.751 0.01 0.676
20 0.751 0.05 0.751
30 0.751 0.33 7.438
60 0.751 0.61 27.498
90 0.751 0.01 0.676
20 0.751 0.05 0.751
30 0.751 0.33 7.438
60 0.751 0.61 27.498
90 0.751 0.01 0.676
20 0.751 0.05 0.751
30 0.751 0.33 7.438
60 0.751 0.61 27.498
90 0.751 0.01 0.676 $145.455
Boom 30 0.751 0.01 0.225
40 0.751 0.14 4.207
75 0.751 0.40 22.539
200 0.751 0.45 67.618
30 0.751 0.01 0.225
40 0.751 0.14 4.207
75 0.751 0.40 22.539
200 0.751 0.45 67.618
30 0.751 0.01 0.225
40 0.751 0.14 4.207
75 0.751 0.40 22.539
200 0.751 0.45 67.618
30 0.751 0.01 0.225
40 0.751 0.14 4.207
75 0.751 0.40 22.539
200 0.751 0.45 67.618 $378.362