Project alpha-beta has two preliminary phases. You pay 21 dollars today. The first phase (phase alpha) takes one year and has a 40% chance of success. If successful, the firm can pay 32 dollars for the second phase.(phase beta) Phase beta has a 27% chance of being successful and lasts one year. If both phases are successful the firm can pay 123 dollars for a final project.

Given all information today, the expected revenue of a successful project in two years is 600 dollars. The volatility of the revenues is 0.70. The riskless rate is zero. The required rate of return on the risky project is 10% continuously compounded.

1. [3pts] Construct the lattice of revenues for a successful project using one period for each year.

2. [12pts] Explain exactly what the firm should do in each stage of the project contingent on market and technical risk. What is the NPV of the project to the firm? Provide full details.