3) A plant currently generates revenues of $3 million per year. Its revenues will either increase by 20% or decrease by 10% with equal probability and stay at that level as long as the plant is in operation. Annual operating costs are $1.5 million. The cost of capital is 8%.

a) If the plant can be sold at any time for $20 million, what is the value of this selling option? ____

A) $1.5 million

B) $2.0 million

C) $2.5 million

D) $3.0 million

b) Instead of being sold, the plant will be shut down if the revenues decrease by 50%. Now, the government offers a guaranteed profit of $10 million to keep the plant running for employment reasons. How much the government subsidy should be to support this program?

1. $6.875 million
2. $7.125 million
3. $8.500 million
4. $10.00 million