The pet industry in China is booming. Chinese shoppers are set to spend 46.3 billion yuan ($7 billion) on their pets by 2022, up from 17.5 billion yuan this year as the market grows at around an annual 20 percent, according to estimates from Euromonitor. The U.S. market may be much bigger with an estimated $44.4 billion in sales in 2019 but it is only growing around 2 percent a year. Even though the market for pets and pet supplies is significant, the success rate varies greatly on such factors as location, community participation, and how well the business is run.

A group of private investors are considering whether to open a pet store (structured as a corporation) near a new condominium complex in the wealthy Shanghai Pudong New Area. The condominium complex is large. 1,500 families are currently living in the complex and an additional 1,000 families are expected to move in by the end of 2020. The pet shop will sell different kinds of animals to the public, as well as a variety of animal supplies and pet accessories, including food, treats, toys, collars, leashes, cat litter, cages and aquariums. Hygienic care (such as pet cleaning) and aesthetic services (such as cat and dog grooming) will also be provided. Currently, getting to the nearest pet store for residents in this condominium complex takes about 40 minutes drive. Some residents order pet accessories online. By setting up a store near the complex, the investors expect that their store will capture 40% of this areas pet market. The investors are concerned that Petland, a large pet franchise, may open a store nearby and reduce their stores market share and profitability. The investors believe that there is a 60% chance that Petland may decide to locate nearby. They do not believe that the existence of their store will affect Petlands decision. The investors are considering wait for one year to see whether Petland decides to locate nearby. In case Petland opens a store nearby, the investors may terminate their investment and sell the store after the first year of operation. The following table contains data that are relevant to this investment decision.

First year's market, RMB	5 million
Annual market growth	3%
Market share without Petland competition	40%
Market share with Petland competition	20%
Gross profit margin ratio without Petland competition	25%
Gross profit margin ratio with Petland competition	19%
Discount rate	8%
Investment cost, RMB	210000
Investment life	4 years
Salvage value at the end of investment life	0
Corporate tax rate in China	25%
Depreciation(straight line), RMB	52500
Staff costs, RMB	150000
Other operating costs, RMB	260000
Probability of Petland entry	60%
Sale on early termination, RMB	100000
Reinvestment cost (to extend 1 year), RMB	20000

Required: 1. Suppose that the investors decide to wait one year, what is the expected value of the best decision? Show your calculations.

2. Suppose the investors decide to invest now, what is the expected value of the best decision? Show your calculations.

3. Based on the real option analysis, should the investors act now or wait? Up to what amount would the investors be willing to pay for an option on this pet store? Show your calculations.