1. JSV, a manufacturer of laboratory equipment, is considering a new capital investment project to make and produce and sell a new type of microscope.

   The first stage of the project requires an investment of $9,000 now for the initial design and market research. There is a 35% probability that this phase will be successful. If it is not successful (probability 65%), the project will be abandoned with zero salvage value.

   If the first stage is successful, a further investment of $320,000 will be required one year from now to make and test prototype microscopes. If this second stage is not successful (probability 40%), the prototypes could be sold for $50,000. If it is successful (probability 60%), JSV would go ahead and produce the microscope.

   Further machinery for full production would cost $450,000 two years from now.

   The net cash flows from production and sales of the microscope will be either $200,000 or $180,000 every year into perpetuity, depending on whether the demand is strong (probability 50%) or weak (probability 50%). Assume investors are risk-neutral. JSVs cost of capital is 10%.

   Construct a decision tree and determine the expected Net Present Value of the project. Should the project be undertaken?