Use the Information for the Question(s)below

question 25

Essay

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.Draw a decision tree detailing this problem.

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Definitions:

WACC

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted, used to evaluate investment opportunities.

Flotation Costs

Flotation costs are the total costs incurred by a company in issuing new securities, including underwriting fees, legal fees, and registration fees.

Net Present Value

A calculation that discounts future cash flows back to their present value to evaluate and compare the profitability of investments or projects.