Question
You own a wholesale plumbing supply store. The store currently generates revenues of $ 1.01$1.01 million per year. Next year, revenues will either decrease by
You own a wholesale plumbing supply store. The store currently generates revenues of
$ 1.01$1.01
million per year. Next year, revenues will either decrease by
9.5 %9.5%
or increase by
5.5 %5.5%,
with equal probability, and then stay at that level as long as you operate the store. You own the store outright. Other costs run
$ 870 comma 000$870,000
per year. There are no costs to shutting down; in that case you can always sell the store for
$ 510 comma 000$510,000.
What is the business worth today if the cost of capital is fixed at
9.5 % question mark9.5%?
(Hint:
Make sure to round all intermediate calculations to at least four decimal
places.)
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