Use binomial method to solve how value of option to sell equipment in year 2 if investment cost is10 million, comparable firms in the industry had beta around 1.2 and standard deviation of 50%. The 10 year T-Bond is10% and market premium 4%. In year 2 equipment can be sold for 4 million and expected value of the company can either go up 64.9% or decrease 39.3%.

2001 2002 2003 2004 2005 2006 INCOME STATEMENT Net Sales COGS Gross Profit SG&A R&D EBIT Income Taxa Net earnings Depreciation Investment in Net Working Capital $0 0 0 1,900 2,100 (4,000) 0 0 900 1,500 $8,600 3,500 5,100 2,300 2,800 0 0 0 900 0 $14,000 5,300 8,700 3,000 3,000 2,700 295 2,405 900 0 $18,000 7,100 10,900 3,700 3,500 3,700 1,415 2,285 900 0 $14,500 6,500 8,000 4,200 3,900 (100) (35) (65) 900 0 $8,000 3,200 4,800 4,000 2,000 (1,200) (300) (900) 900 (1,500) 2001 2002 2003 2004 2005 2006 INCOME STATEMENT Net Sales COGS Gross Profit SG&A R&D EBIT Income Taxa Net earnings Depreciation Investment in Net Working Capital $0 0 0 1,900 2,100 (4,000) 0 0 900 1,500 $8,600 3,500 5,100 2,300 2,800 0 0 0 900 0 $14,000 5,300 8,700 3,000 3,000 2,700 295 2,405 900 0 $18,000 7,100 10,900 3,700 3,500 3,700 1,415 2,285 900 0 $14,500 6,500 8,000 4,200 3,900 (100) (35) (65) 900 0 $8,000 3,200 4,800 4,000 2,000 (1,200) (300) (900) 900 (1,500)