High Roller Properties is considering building a new casino at a cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows 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. The project's WACC is 11.0%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.7 million after tax at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. ?
A. $437
B. $457
C. $318
D. $418
E. $398
Answer: E
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