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:

Recorded

This term refers to the action of documenting financial transactions in the accounting records of a business.

Statement of Financial Position

A financial statement that presents the assets, liabilities, and equity of an entity at a specific date, offering a snapshot of its financial health.

Chart of Accounts

A systematic listing of all accounts used by an organization, making up its general ledger and helping categorize transactions.

Account Numbers

Unique identifiers assigned to individual accounts within a financial recording system to differentiate and track financial transactions.