Exhibit II

The cash flows of a two-year project when demand turns out to be high and when demand turns out to be low are presented below. The probability that demand will be high is 50% and the probability that demand will be low is 50%. The appropriate discount rate is 11%

Year	Cash flow if demand is "high"	Cash flow if demand is "low"
0	-100	-100
1	100	50
2	100	50

Refer to Exhibit II. What is the expected NPV of the project? Round your final answer to the nearest dollar. _____

If demand turns out to be high, suppose that the firm has the option to invest an additional $50 at the end of Year 1 to increase production capacity. Doing so would result in an annual cash flow of $200 (rather than $100) at the end of Year 2. What is the expected NPV of the project, after accounting for this expansion option? Round your final answer to the nearest dollar. _____

Refer to your previous answers. What is the value for this expansion option? Round your final answer to the nearest dollar. _____