Boxer Ltd manufactures plywood sheets used in the building industry. The selling price per sheet is 10.60 in the economys good state and 7.30 in the bad state. The risk-neutral probability of each of these states is 0.5. Boxer can sell all the sheets that it produces.

The sheets can be made from either two types of wood, pine and fir. The cost per sheet using pine is 10.10 in the good state and 6.80 in the bad state.

The cost per sheet using fir is 9.10 in the good state and 8.50 in the bad state.

Boxer is committed to producing one million sheets during the current year (year 1) using pine and is planning its production for year 2. Assume a risk-free rate of zero.

Assume now that at the end of year 1, Boxer will know the economys state in year 2.

Suppose that the option to switch to production using fir requires machinery to be modified now. What is the maximum amount Boxer should pay to modify the machinery? Explain.