Mega Bricks is a new company formed to manufacture plastic building blocks for the UK toy market. The venture is somewhat risky and the Finance Director needs your advice. There is a 25% chance that demand in the first year will be low. If it is low, there is a 78% chance that it will remain low in subsequent years. However, if the initial demand is high, there is a 90% chance that it will stay high. The immediate problem faced by the company is to decide which type of production process to install, the Speedy process or the Slow process. The Speedy process costs 600,000 whereas the Slow process costs only 200,000. However, if (and only if) the Slow process is chosen, an additional Slow process can be purchased and installed for only 120,000 next year to add to the existing process equipment. The table below gives the certainty equivalent cash flows for each decision and possible outcome. Process Demand in first year Decision at end of year None Demand in second year High 1,000,000 Low 200,000 High 150,000 Speedy process -600,000 Low 30,000 None High 850,000 Low 100,000 Slow process -200,000 Expand -120,000 High 800,000 High 110,000 Low 100,000 High Do not expand 430,000 Low 180,000 Low 50,000 None High 200,000 Low 95,000 Required: (a) Draw a decision tree showing the decisions and possible outcomes for Mega Bricks over the first two years of operation (create it in Excel and then paste in the answer file in Word). (b) If the discount rate is 12%, compute the net present value of: (i) the decision to invest in the Speedy process; (6 marks) (ii) the decision to invest in the Slow process. (12 marks) (c) What is the value of the option to expand by purchasing the second Slow process at the end of the first year? (5 marks) (d) Should Mega Bricks invest in the Speedy process or the Slow process? (4 marks) (e) Briefly explain each of the following terms: (i) Real option; (ii) Abandonment value; (iii) Expansion value.