Alcibides Inc. is considering the purchase of $2-$year racehorse named Box Spread.

Information:

The estimated purchase price of Box Spread at the upcoming Keenland sale is expected to be

$$6M.$ This cost can be depreciated for $10$ years to a book value of zero.

It is expected that Alcibiades Inc.$\text{'}$s earnings will be sufficient that it can use all of the

depreciation

The estimated economic life of Box Spread $($race career and breeding$)$ is expected to be $10$

years

Effective tax rate $=\mathrm{.}40$

Cost of capital $=\mathrm{.}20$

An economist at Xavier University's Equine Institute estimates the following annual revenues

and operating costs and their probabilities:

Revenues:

$$6\mathrm{.}0M$ with probability of $0\mathrm{.}5$

$$3\mathrm{.}0M$ with probability of $0\mathrm{.}5$

Operating Costs:

$$1M$ with probability of $0\mathrm{.}5$

$$2M$ with probability of $0\mathrm{.}5$

Questions:

Using a decision tree, determine the Box Spread's expected net present value. Should Alcibiades Inc.

purchase Box Spread.