A firm is considering a 2-year project with an initial outlay of $12,000. The costs of operating in years 1 and 2 are known with certainty to be $30,000. However, the revenues are uncertain. There is a
50% chance that year 1 revenues will be $42,000 and a 50% chance that year 1 revenues will be
$30,000. Second year revenues are also uncertain, but depend to some extent on the state realized
in year 1. If the good state is realized in year 1 (i. e., revenue of $42,000), there will be a 50% chance
of an upturn to $60,000 in year 2, and a 50% chance of a downturn to $36,000 in year 2. Similarly, if
the bad state (i. e., revenue of $30,000) is realized in year 1, there will be a 50% chance of an upturn
to $36,000 in year 2, and a 50% chance of a downturn to $12,000 in year 2.
a. Use DCF analysis to find the expected NPV of this project, ignoring the option to abandon,
assuming a 10% cost of capital.
b. What is the project’s correct NPV, considering the abandonment option, and what then is the
value of the option to abandon?

For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the basic assumption, component, or accounting principle that is applied (if you agree) or violated (if you disagree).wagner corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar. spooner oil company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. no mention of the change was included in the financial statements. the change had a material effect on spooner's financial statements. cypress manufacturing company purchased machinery having a five-year life. the cost of the machinery is being expensed over the life of the machinery. rudeen corporation purchased equipment for $180,000 at a liquidation sale of a competitor. because the equipment was worth $230,000, rudeen valued the equipment in its subsequent balance sheet at $230,000.davis bicycle company received a large order for the sale of 1,000 bicycles at $100 each. the customer paid davis the entire amount of $100,000 on march 15. however, davis did not record any revenue until april 17, the date the bicycles were delivered to the customer. gigantic corporation purchased two small calculators at a cost of $32.00. the cost of the calculators was expensed even though they had a three-year estimated useful life. esquire company provides financial statements to external users every three years.