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Value of the option to sell the plant

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You own a small manufacturing plant that currently generates revenues of £2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as you operate the plant. Other costs run 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%. What is the value of the option to sell the plant?

Reference no: EM131055680

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