C. Piperis (Properties) Ltd has the opportunity to acquire a lease on a block of flatsthat has only two years remaining before it expires. The cost of the lease would be£100,000. The occupancy rate of the block of flats is currently around 70 per centand the flats are let almost exclusively to naval personnel. There is a large naval base located nearby, and there is little other demand for the flats. The occupancy rate of the flats will change in the remaining two years of the lease, depending on the outcome of a defence review. The navy is currently considering three options for the naval base. These are:

● Option 1. Increase the size of the base by closing one in another region and transferring the personnel to the one located near the flats.

● Option 2. Close the naval base near to the flats and leave only a skeleton staff there for maintenance purposes. The personnel would be moved to a base in another region.

● Option 3. Leave the base open but reduce staffing levels by 20 per cent.

The directors of Piperis have estimated the following net cash flows for each of the two years under each option and the probability of their occurrence:

Note that the sum of the probabilities is 1.0 (in other words it is certain that one of the possible options will arise). The business has a cost of capital of 10 per cent.
Should the business purchase the lease on the block of flats?

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Probability Option 1 Option 2 80,000 0.6 12,000 0.1 Option 3 40,000 0.3 1.0