Question
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.
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 |
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 |
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