Question
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
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%. The value of the option to abandon production will be closest to: Group of answer choices 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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