A machine costs R14 000. It has a 2-year life and a 15% discount rate correctly reflects its risk. Its performance depends upon the state of the world:

State Year 1 Year 2 Probability I 110 000 110 000 0.70 II 1 6 000 1 6 000 0.10 III 1 4 000 1 4 000 0.20 The company can sell the machine at the end of Year 1 for R6 000. At the end of Year 2 the machine will be worthless. Advise the company.

AppendixLO1