What is the value of the option to sell the plant

Assignment Help Financial Management

Reference no: EM131070858

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 dollars per year. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%. What is the value of the option to sell the plant?

Reference no: EM131070858

Questions Cloud

Installation of geothermal system rather than gas furnace : It is proposed to install a geothermal heat pump to provide space heating to a four-bedroom home that requires 23,300 kWh of space heating per year. The heat pump and vertical well loop system needed for geothermal heating costs $18,400 to install. W..

Activities be performed by various marketing institutions : The marketing process does not take place automatically. It requires that certain marketing functions or activities be performed by various marketing institutions - and by consumers themselves. Discussion Name a product for which all eight marketing ..

The sustainable growth rate represents : The sustainable growth rate represents the ____ rate at which a firm can grow:

Assuming zero movement in the market : Flower Inc. announced a $1.50 per share dividend with an ex-date of May 15. If the closing price of Paul's stock was $35 on May 14. What would we expect the price to be on the close of the 15th, assuming zero movement in the market?

What is the value of the option to sell the plant : 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, a..

Great sales make great products : Comment on the following statements using two separate examples in each response : 1."Great products make great sales?;" and, 2."Great sales make great products?"

Sales of the product are expected to decline : Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a reat of 5% (-5%) annually for..

Firm changed its capital structure to all equity : A firm currently has $40 worth of debt at YTM=5%, $60 worth of equity with cost of equity (RE) equal to 15%. What would be the cost of equity if the firm changed its capital structure to all equity? The tax rate is zero.

Firm re-capitalized by borrowing : An all equity firm worth $100 today will be worth either $150 or $80 in one year in the good and bad states respectively. What would be the returns to equity in each state of the world be if the firm re-capitalized by borrowing $60 (and paying this a..

User Account

All Pages