Problem 3 (Weight 20 %) As a controller in the company Electric Battery Inc, you will evaluate whether the project Magmatikk should be cancelled today or kept. If you keep the project, you will need to invest another $5 million today. The capital cost (WACC) is 10 % (yearly). If the project is kept there is 40 % probability that the project will yield good profitability, while there is 60 % probability for lower earnings. The table below shows estimated sales and costs for both of these scenarios from year 1 and onwards, then based on which decision you make after one year from now. Scenarios: 1st choice after 1 year: invest $5 million in year 1 2nd choice after 1 year: no investments in tear 1 Positive scenario (40 % probability) Sales and costs after 1 year from now, and every year forward, are estimated to be $2.5 million and $1.8 million, respectively Sales and costs after 1 year from now, and every year forward, are estimated to be $1.5 million and $1.2 million, respectively Negative scenario (60 % probability) Sales and costs after 1 year from now, and every year forward, are estimated to be $2.0 million and $1.5 million, respectively Sales and costs after 1 year from now, and every year forward, are estimated to be $0.9 million and $0.8 million, respectively Answer the following questions:

a) Draw a decision tree for the project Magmatikk.

b) Should the project be cancelled or kept? Show calculations.