3 . The XYZ firm can invest in a new DRAM chip factory for $ 425 million . The factory* which must be invested in today , has cash flows two years from now that depend on the state of the economy . The cash flows when the factory is running at full capacity are described by the following tree diagram :" Year O Year ! Year 2 GG $ 1 billion if 2 good years G GB $ 200 million if I good and I bad year* BG B BB - $500 million if 2 bad years In year I , the firm has the option of running the plant at less than full capacity . In this case , workers are laid off , production of memory chips is scaled down , and the subsequent cash flows are half of what they would be when the plant is running at full capacity . An alternative use for the firm's funds is investment in market portfolio . In the states* that correspond to the branches of the tree above , $ I invested in the market portfolio grows as follows :"