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?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning