Suppose that if you buy the business an existing business for $2 million. you can...
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Suppose that if you buy the business an existing business for $2 million. you can expand the business by investing another $500,000 after you learn the true future demand state. This would make the present value of the business $4 million in the high-demand state, $2.5 million in the moderate demand state, and $1.0 million in the low demand state. Draw a decision tree to reflect the option to expand. Evaluate the alternatives. What is the net present value of the business if you consider the option to expand? How valuable is the option to expand?
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