Problem 2) You can acquire an existing business for $2 million. You are uncertain about future demand. There is a 40% chance of high demand, in which case the present value of the business will be $3 million. There is a 25% chance of moderate demand, and the associated present value is $1.5 million. Finally, there is a 35% chance of low demand, in which case the present value is $1 million. Draw a decision tree for this problem. What is the expected net present value of the business? Should you invest?

Problem 3) Suppose that if you buy the business described in Problem 2, you can expand the business by investing another $500,000 after you learn the true future demand state. This would make the present value of the business $4 million in the high-demand state, $2.5 million in the moderate demand state, and $1.0 million in the low demand state. Draw a decision tree to reflect the option to expand. Evaluate the alternatives. What is the net present value of the business if you consider the option to expand? How valuable is the option to expand?

Please only answer problem 3 and please draw the decision tree.