Decision Trees, Uncertainties, and Real Options.

1. A company is considering opening a subsidiary in Japan. The profits of this subsidiary will depend on how quickly the economic situation in the country improves. There is a fifty-fifty chance that it will recover this year. The company is torn between an immediate opening of the subsidiary and a deferred opening by one year. Construct the corresponding decision tree for this problem.

2. With an investment of 500 million euros, BullGom will produce a chewing gum that remains perpetually fresh in the mouth. There is a 60% probability that profits will be 100 million euros per year, 20% that they will be 50 million euros, and 20% that they will be zero. Marketing studies show that the state of the market will be known with certainty in one year. The project's cost of capital is currently 11%. In one year, it will be 9% (20% probability) or 11% (80% probability); thereafter, it will not change. The evolution of the cost of capital is not correlated with the chewing gum market.Construct the decision tree.