A project runs for two periods and then is sold at a fair price. Its present value without flexibility is $30 million, and the initial investment is $20 million. The annual volatility of the project s present value is expected to be 15% and its WACC is 12%. At the end of the second period there is an option to expand, increasing the value of the project by 20% by investing an additional $5 million. The risk-free rate is 5%. (a) What is the project s NPV without the option to expand? (b) What is its ROA with the option to expand?

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