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:

Adaptive Value

The extent to which a genetic trait or behavior enhances the survival or reproductive success of an organism in its environment.

Terrestrial Insects

Insects that live primarily on land rather than in water or air, with adaptations to various terrestrial environments.

Tracheae

A network of small tubes in insects and some arachnids that facilitates respiratory gas exchange directly with body cells.

Gas Exchange

The biological process through which organisms exchange gases with their environment, including the intake of oxygen and the release of carbon dioxide.