CSI Properties is developing a new amusement park that will have a startup cost of ten million dollars. The after-tax cash inflows the amusement park generates will depend on whether the local city government passes a new law imposing a new income tax. Currently there is a 50% chance the law will pass. If the law is passed CSI’s after-tax cash inflows will be $1.875 million per year for the next 5 years. If it doesn’t pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. CSI’s has a discount rate of 11.0%. If the tax is passed, CSI Properties has the option to abandon the project after one year. If they exercise this option then the property can be sold to net $6.5 million after tax at the end of the first year.
What is the value (in thousands) of this abandonment option?
