1. You possess a small manufacturing facility making $2 million annually. Depending on along-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 theplant's operational duration. Additional costs tally up to $1.6 million per year. You can sellthe plant at any time to a large conglomerate for $5 million and your cost of capital is 10%.a. If the government does not award you the contract and your sales decrease by 25%,what will be the value of your plant?b. Given the embedded option to sell the plant, compute the value of the plant.c. Suppose that you are not able to sell the plant, but you can shut it down at any time atno cost. What is the value of the option to abandon production? |d. Companies sometimes proceed with capital projects despite their negative NPV.Critically discuss what drives this decision.

Explanationa. Calculation of Plant Value if Contract is Lost:Calculate Revenue Reduction: Revenue…

Answered: 1. You possess a small manufacturing…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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