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Hello Cath, and members, would greatly appreciate it, if someone can help with this question. Thanks in advance
L is considering an investment in a machine that has a useful life of 3 years. The machine will reduce L’s overheads but the amount of annual savings cannot be determined with certainty at the project appraisal stage. The annual savings will be $10000, $20000 or $30000 each of which is regarded as equally likely. The savings generated in the first year will continue in the second and third years.The machine will cost $35000 to buy and will have zero scrap value. L requires a 10% returns on its capital investments. In order to encourage L’s board to buy the machine, the vendor has offered to take the machine back at the end of year 1 and refund $20000 of the initial investment if it does so. What is the value of the abandonment option……
answers: 10800
Sorry for the delay
Ive double checked the syllabus for CIMA P2 ( it’s called 2015 syllabus but this is the year it takes effect from – so is valid for 2016 and 2017 etc)
From the exam learning outcomes – I can see that students need to discuss ‘real options’ but it does not say you need to calculate them. The calculation of options is something you will cover at strategic level – an understanding is what you will need for P2 exam.is in the link to CIMA syllabus – please see below:
Hope that’s ok.
Thank you very much , Cath. It is such a bother as I encountered in in the practice exams.
But your explanation is well appreciated. Cheers
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