Management attaches a 40 percent probability to this occurrence, given the fact that the new technology "bombs out" in the first year. If the technology proves itself, second-year cash flows may be either $1,800, $1,400, or $1,000, with probabilities of .20, .60, and .20, respectively.

In the third year, cash inflows are expected to be $200 greater or $200 less than the cash flow in period 2, with an equal chance of occurrence.

(Again, these cash flows depend on the cash flow in period 1 being $1,000.)

All the cash flows are after taxes.