I have the asset that I am thinking of for project which will last for 5 years. If I invest in project, I have the option to abandon and sell asset in year 2.
Purchase Price $50,000
Abandonment Selling Price in Year 2 $25,000
Cost of Capital 12%
Year 1 Year 2 Year 3 Year 4 Year 5
Free Cash Flow Forecast
35% $6000 $80000 $10000 $14000 $22000
40% $2500 $4700 $8600 $10000 $17000
25% $(3000) $(4500) $(5600) $(6500) $4000
Determine the value of abandonment option?