Question 19

1. THE FOLLOWING INFORMATION RELATES TO QUESTIONS 19 AND 20 ONLY You own a small manufacturing plant that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as you operate the plant. Other costs run $1.6 million dollars per year. Assume that you can shut down the plant at no cost at any time and your cost of capital is 10%.

   QUESTION 19 Given the embedded option to abandon production the value of your plant will be closest to:

   	A.	$8.0 million
   	B.	$4.0 million
   	C.	$5.0 million
   	D.	$6.5 million
   	E.	None of the above

Question 20

1. REFER TO THE INFORMATION AT THE TOP OF QUESTION 19.

   The value of the option to abandon production will be closest to:

   	A.	$1.0 million
   	B.	$0.5 million
   	C.	-$1.0 million
   	D.	$3.0 million
   	E.	None of the above