You own a small company that currently generates revenue £1 million per year. Next year, based upon the decision on a long-term government contract, the revenue will either increase by 20% if you get the contract or decrease by 30% if you lose the contract, and the revenue will stay at that level as long as you operate it. The probability of getting the contract is 60%. The annual costs of running the business are always £0.8 million. If you shut down the company, it will cost £1 million. But you can sell the company at any time to a large conglomerate for £2 million. Your cost of capital is 10%. The value of the option to sell your company is closest to:
[5 marks]
£0.8 million
£1.0 million
£1.2 million
£1.4 million