(Solution) - A firm that has undertaken a project has the option -(2025 Original AI-Free Solution)

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A firm that has undertaken a project has the option to sell some of its equipment and facilities and to sublet out some of the project workload. The project's current value is V0 = $10M. Anytime over the next three years, the firm can sell off $4M in resources but receive an expected 20% decrease in net cash flows (and therefore, a 20% decrease in project value). Let r = 6% and a = 30%. A binomial lattice will be used with a one-year time increment. Determine the value of this scale-down investment opportunity.