I cannot understand the decision tree in this project how to calculate the real option, and do not know how to do with requirements.

QUESTION:

As the management team has the flexibility to decide whether to further expand the Phase 1 investment in this country in year 5, the valuation of Phase 2 investment should reflect the added value of the call option.

You can use the given business risk volatility () to construct the binomial tree for the path of gross profits as illustrated in the graph below. Assume that the annual gross profits are equally likely to either increase or decrease by compared to the previous year's level.