MNT company owns a bargain retail store in Alexandria. The store generated revenue of $1,500,000 over the most recent year. In the coming year (t=1) revenues will either decrease by 20% or increase by 10% (with equal probability) and then stay at that level forever. Total costs of operating the store are $1,200,000 per annum. MNT can shut the store at no cost now, or in exactly one year from now. If MNT shuts the store, it can sell the stock and equipment for $200,000. The relevant discount rate is 10% p.a. (effective rate).

a) Draw a decision tree illustrating the options that MNT faces. (Label the tree clearly to show each decision option, the information nodes, the probabilities of each possible outcome, and the relevant time periods)

b) What is the business worth today with the abandonment option?

c) What is the value without the abandonment option?