You own a small manufacturing plant that currently generates revenues of $2 million per year.Based upon a decision on a long-term government contract to be announced tomorrow, your revenues will either increase by 20% or decrease by 25% in the next year, with equal probability, and stay at that level as long as you operate the plant.Other costs run $1.6 million dollars per year, regardless of the outcome. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%.

(1)What is the value of your plant with the embedded option to sell the plant?

(2)Assume that you are not able to sell the plant, but you are able to shut down the plant immediately at no cost at any time. What is the value of your plant with the embedded option to abandon production?

(3)Assume that you are not able to sell the plant, but you are able to shut down the plant immediately at no cost at any time. What is the value of the option to abandon production?