A Factory Currently Produces Output That Sells for $125 Million

question 52

Multiple Choice

A factory currently produces output that sells for $125 million. Production costs are $100 million. Each year it is equally likely that the selling price of the output will be 25% higher or
30% lower. Assume the cost of capital is 10%, and that it will cost nothing to close the plant or
To reopen it. What is the present value of this factory if it exists for 2 years?

• A)$41.80
• B)$50.04
• C)$36.35
• D)$57.73

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Definitions:

Interest Rate

The percentage of a sum of money charged for its use, typically expressed as an annual rate.

Income

Profits received, at routine intervals, from efforts in employment or investment projects.

Budget Line

This line delineates the combos of two goods a consumer can procure, given their income and the goods' prices, demonstrating the trade-offs and opportunity costs within their budget.

Consumption

The use of goods and services by households or individuals, often measured to understand economic activity and consumer behavior.