Reference no: EM133059932

Pinder Ltd is considering building a solar power plant. The solar power plant will cost $9.8 million immediately, and will take 1 year to build. If there is high demand for electricity, the solar power plant will generate $4.9 million per year in perpetuity. If there is low demand for electricity, the solar power plant will generate $0.15 million per year in perpetuity. The probability of high demand is 60% and the probability of low demand is 40%. In order to incentivize solar power, the government is providing an offer for firms to sell their solar power plants to the government at a 10% discount to cost, exactly two years after the completion of the solar power plant. In other words, if the cost of building the solar power plant is $1, the government will offer to buy it at $0.9. There are no other options to sell the solar power plant other than to the government. The required rate of return for Pinder Ltd is 10%. Assume cash flows occur at the end of each year, except for initial cash flows. Based only on the information above, what is the value of the option to sell the solar power plant to the government, using the decision-tree method? (round to the nearest two decimal places)