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1 Real Page 3 of 12 Page 5 of 12 3480 --MIDTERM EXAM WINTER 2016 Use the information below to answer questions 11 & 12.
1 Real Page 3 of 12 Page 5 of 12 3480 --MIDTERM EXAM WINTER 2016 Use the information below to answer questions 11 & 12. Pragmatic Furniture Inc owns a manufacturing plant that currently generates revenues of million per year. Next year, based upon a decision on a long-term contract, revenues will either plant operates. As well, the firm has costs of $1.6 million per year and its cost of capital is 10%. increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as the 11) Assuming the firm can not sell the plant but it can shut down the plant at no cost at any time, the value of the option to abandon production, is closest to: a) $0 million b) $0.5 million c) $3.0 million d) $3.5 million e) $4.0 million domlid ayer 70 lash of Capdelaf be 2 miditas y'.2 t dmill 4.75 9.6.15 -1.95miro 1.95-1.6 olan 160 pogler Assuming that it will cost the firm S1 million to shut down the plant, but the firm is able to sell the plant for $5 million at any time, the value of the option to sell the plant, is closest to: a) S0 million - $0.5 million $3.0 million $3.5 million $4.0 million dan dinhatar In order to succeed two 1 Real Page 3 of 12 Page 5 of 12 3480 --MIDTERM EXAM WINTER 2016 Use the information below to answer questions 11 & 12. Pragmatic Furniture Inc owns a manufacturing plant that currently generates revenues of million per year. Next year, based upon a decision on a long-term contract, revenues will either plant operates. As well, the firm has costs of $1.6 million per year and its cost of capital is 10%. increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as the 11) Assuming the firm can not sell the plant but it can shut down the plant at no cost at any time, the value of the option to abandon production, is closest to: a) $0 million b) $0.5 million c) $3.0 million d) $3.5 million e) $4.0 million domlid ayer 70 lash of Capdelaf be 2 miditas y'.2 t dmill 4.75 9.6.15 -1.95miro 1.95-1.6 olan 160 pogler Assuming that it will cost the firm S1 million to shut down the plant, but the firm is able to sell the plant for $5 million at any time, the value of the option to sell the plant, is closest to: a) S0 million - $0.5 million $3.0 million $3.5 million $4.0 million dan dinhatar In order to succeed two
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