Company ABC is considering opening a hotel. The initial outlay of this investment is £15 million. The present value of the expected cash flows from the hotel is £10 million. Company ABC is convinced that the project could be abandoned in 5 years by selling the hotel for £8 million. The variance in the present value of the cash flows is 0.1. While the opportunity cost of the project is 7%, the (continuously compounded) risk-free rate is 2%.
Should the company go ahead with the project? Clearly show your workings and explain each step in your calculations.