) A firm can undertake an investment project today which has equal probabilities of yielding cash flows of $160 or $70 a year from now (t=1). The project costs $100 today. The firm can also invest another $100 at t=1, which will yield with equal probability cash flows at t=2 equal to either 130% or 70% of cash flows generated at t=1. Assume the discount rate is 10%.

a.What is the value of this investment opportunity if the firm had to commit today about the investment of $100 to be made at t=1?

b.What is the value of this investment opportunity if the firm could wait till t=1 (after information about the cash flow from the initial investment is revealed) to decide whether to invest $100 at t=1?