Question
You own a widget factory that can produce 100 widgets per year. The fixed costs of making widgets are $2000 per year, and each widget
You own a widget factory that can produce 100 widgets per year. The fixed costs of making widgets are $2000 per year, and each widget costs $30 to make. You can currently sell a widget for $60. The yearly variance of widget prices is 8.1%, and the risk free rate is 1.9%, compounded annually.
Each year, instead of making widgets, you can choose to accept a government contract with a guaranteed profit of $500. Choosing this in one year does not mean you cannot make widgets next year.
The factory has 2 years left in its useful life, at which point it will have no salvage value. Your first cash flow is one year from today.
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