A firm is examining a new project. The initial cost is $2,000,000. At year 1 it expects to get a cash inflows equal to $4,500,000 if the project is a success and $1,500,000 if the project is a failure. The probability of success is 50%. The discount rate is 10%.

1. What is the NPV of the project? (3 marks)
2. If the project is a success (at year 1) the firm can invest additional $1,000,000 and get two additional cash inflows of $4,500,000 each year during the following two years. What would be the NPV of the project now? (3 marks)
3. What is the value of the option to expand? (2 marks)