ability, and then stay at that level as long as you operate the store. You own the store outrig

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
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You own a wholesale plumbing supply store. The store currently generates
revenues of $1 million per year. Next year, revenues will either decrease by 9.6% or
increase by 4.8%, with equal probability, and then stay at that level as long as you
operate the store. You own the store outright. Other costs run $880,000 per year. There
are no costs to shutting down; in that case you can always sell the store for $510,000.
What is the business worth today if the cost of capital is fixed at 9.6%?

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