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You own a small manufacturing plant that currently generates revenues of $2 million per year. Next...

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 is -------$ million. (round to the nearest million)

2. If you are not awarded the government contract and your sales decrease by 25%, then the value of your plant is ------$ million. (round to the nearest million)

3. Given the embedded option to sell the plant, what is the value of your plant? The value is -------$ million. (round to one decimal)

4. 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. Given the embedded option to abandon production the value of your plant is --------$ million. (round to the nearest million)

5. 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. The value of the option to abandon production is -------$ million. (round to the nearest million)

6. Assume that it will cost you $1 million to shut down the plant, but you are able to sell the plant for $5 at any time. What is the value of the option to sell the plant? The value is------ $ million. (round to the nearest million)

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jeff jeffy answered 1 year ago
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