Assume a company runs a plant for which the value one year from now will be either $1,000 if market growth is positive or $250 if market growth is negative. The probability of positive market growth is 60 percent, and the probability of negative market growth is 40 percent.
At any time, the company can choose to close the plant and collect the salvage value of $285 if scrapped today or $300 if scrapped in one year. The cost of capital for the plant is 10 percent, and the risk-free rate is 5 percent.
Estimate the value of the plant using the standard NPV, decision tree analysis (DTA), and realoption valuation (ROV) valuation models. Explain the differences in results.