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. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%.

1. If you are awarded the government contract and your sales increase by 20%, then the value of your plant will be closest to:

A. $5 million

B. $8 million

C. $0

D. $4 million

2. Assume that you are not able to sell the plant, but you are able to shut down the plant at no cost at any time. Draw a decision tree detailing this problem