United Fruit Company (UFC) is worried that its banana plantation in Honduras will be expropriated during the next 12 months. However, UFC knows that compensation of $100 million will be paid at the year's end if the plantation is expropriated. If the expropriation does not occur this year, the plantation will be worth $300 million at the end of the year. A wealthy Honduran has just offered UFC $128 million for the plantation. UFC would have used a discount rate of 22 percent to discount the cash flows from its Honduran operations if the threat of expropriation were not present. Can you suggest how UFC should evaluate whether or not to sell the plantation now for $128million?
Option 1: the plantation being expropriated and UFC get $100 million at the end of the year.
The present value of the compensation is PV = 100 / (1+R) = 100 / (1+22%) ...
This solutions describes how UFC should evaluate whether or not to sell the plantation now for $128 million.