Use the Information for the Question(s)below

question 24

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 it will cost $1 million to shut down the plant,but you are able to sell the plant for $5 million at any time.The value of the option to sell the plant will be closest to:

• A)$3.0 million.
• B)$6.0 million.
• C)$5.0 million.
• D)$0.5 million.

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Definitions:

Malignant Growths

Abnormal and uncontrolled cell division resulting in tumors that can invade and destroy nearby tissue and spread to other parts of the body.

Highest Incidence

The rate at which a particular disease or condition is most frequently diagnosed within a defined population or area.

Death Rate

The number of deaths in a particular population, scaled to the size of that population, per unit of time, often expressed per 1,000 or 100,000 individuals annually.

Lymphoma

Cancer of the lymphoid tissues, including lymph nodes.