Should you do the project based on the NPV analysis? If the project can be sold/abandoned for a resale value of $100 million next year, what is its value in terms of the decision tree analysis (DT)?

DISCUSSION QUESTION

A project has a present value (PV) of $100 million today and a 50% probability to be worth either $130 million or $90 million next year. Assume that the WACC is 10%, the simple annual risk-free rate is 4%, and the project costs $103 million today.

1. Should you do the project based on the NPV analysis?
2. If the project can be sold/abandoned for a resale value of $100 million next year, what is its value in terms of the decision tree analysis (DT)?
3. If the project can be sold/abandoned for a resale value of $100 million next year, what is its value in terms of the real option analysis (ROA)?
4. Why is the DT value different from the ROA value?