Use the Information for the Question(s)below

question 35

Multiple Choice

Use the information for the question(s) below.
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 per year.You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%.
-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 will be closest to:

• A)$8.0 million.
• B)$4.0 million.
• C)$5.0 million.
• D)$6.5 million.

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Definitions:

BCG Matrix

A strategic business tool developed by the Boston Consulting Group to help organizations with portfolio management, analyzing business units or product lines based on their market growth rate and market share.

SWOT Analysis

A strategic planning tool used to identify and analyze the Strengths, Weaknesses, Opportunities, and Threats related to business competition or project planning.

Per-Unit Costs

The total expense incurred to produce, store, and sell one unit of a product or service, including material, labor, and overhead costs.

Market Share

The percentage of an industry's total sales that is earned by a particular company over a specified time period.