As a final point, Coleman Ltd insist that they should have the right to walk away from the contract at the end of the first year if the price of copper is below the benchmark rate. In that case, you estimate that they would be able to sell their transport equipment for $1.5 million. The required rate of return for the project is 12% per annum. What is the value, today, of the option to walk away from the contract?

Coleman Ltd is a transport company that has been asked to assess an opportunity to provide services to a mining company, Aztec Ltd, that extracts copper in Western Australia. The 10-year contract provides that the cash flows paid to Coleman Ltd at the end of each of the 10 years of the contract are a function of the international price for copper during only the first year of the contract. Specifically, if the average price of copper in the first year is greater than a benchmark price, then the contract allows for Coleman Ltd to be paid a net cash flow of $1,000,000 per annum over the life of the contract. If the average price of copper in the first year of the contract is less than the benchmark price, then Coleman Ltd enjoys a net cash flow of only $250,000 per annum over the life of the contract.
You estimate that there is a 60% chance that the price of copper will exceed the benchmark rate in the first year of the contract. You also estimate that Coleman Ltd will have to invest $2 million initially to purchase the specialized transport equipment necessary to service the contract.