You possess a small manufacturing facility making $2 million annually. Depending on a long-term government contract decision, next year, your revenue could either rise by 20% or drop by 25%, both outcomes having an equal chance, and maintaining that level for the plant's operational duration. Additional costs tally up to $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%. If the government does not award you the contract and your sales decrease by 25%, what will be the value of your plant?
You possess a small manufacturing facility making $2 million annually. Depending on a long-term government contract decision, next year, your revenue could either rise by 20% or drop by 25%, both outcomes having an equal chance, and maintaining that level for the plant's operational duration. Additional costs tally up to $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%. If the government does not award you the contract and your sales decrease by 25%, what will be the value of your plant?
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 8P
Question
- You possess a small manufacturing facility making $2 million annually. Depending on a long-term government contract decision, next year, your revenue could either rise by 20% or drop by 25%, both outcomes having an equal chance, and maintaining that level for the plant's operational duration. Additional costs tally up to $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%. If the government does not award you the contract and your sales decrease by 25%, what will be the value of your plant?
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