Maytag Inc. can invest in a new DRAM chip factory for $425 million. The factory, which must be invested in today, has cash flows two years from now that depend on the state of the economy. The cash flows when the factory is running at full capacity are described by the following tree diagram:(Diagram attached)

In year 1, Maytag Inc. has the option of running the plant at less than full capacity. In this case, workers are laid off, production of memory chips is scaled down, and the subsequent cash flows are half of what they would be when the plant is running at full capacity.

An alternative use for firm's funds is investment in the market portfolio. In the states that correspond to the branches of the tree above, $1 invested in the market portfolio grows as follows:

Assume that the risk-free rate is 5 percent per year.

1. (a)(5 points) Compute the projects present value without the option to scale down
2. (b)(5 points) Compute the projects present value with the option to scale down
3. (c)(5 points) What is the value of the option to scale down?

ytsr Ii 31er 11: or 2 Very gum] Goo $1 billion Medium 32% million Bali Very list! 4500 million In year 1I Maytag Inc. has the option of running the plant at less than full capacity. In this case, workers are laid o', production of memory chips is scaled down, and the subsequent cash ows are half of what they:r would be when the plant is running at full capacity. An alternative use for rm's flmds is investment in the market portfolio. In the states that correspond to the branches of the tree above, $1 irwested in the market portfolio grows as follows: year I] yearl year 2 $1.20 $1.10 $1