Use the Information for the Question(s)below

question 60

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.The value of the option to abandon production will be closest to:

• A)$1.0 million.
• B)$0.5 million.
• C)-$1.0 million.
• D)$3.0 million.

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Definitions:

Pizza Buffet

A dining establishment offering an all-you-can-eat selection of pizzas along with possibly other foods and beverages, for a set price.

Flat Rate

A fixed charge or fee that does not vary with the quantity of the service or goods provided.

Clientele

The clients or customers served by a professional or a business.

Employer-provided Health Insurance

Health insurance coverage offered to employees (and often their dependents) as part of an employment benefits package.