these questions related toReal Options step by step, show each and every working. Qno1. Katie Watkins, an entrepreneur, believes consolidation is the key to profit in the fragmented recreational equine industry. In particular, she is considering starting a business that will develop and sell franchises to other owner-operators, who will then board and train hunter-jumper horses. The initial cost to develop and implement the franchise concept is $8 million. She estimates a 25% probability of high demand for the concept, in which case she will receive cash flows of $13 million at the end of each year for the next 2 years. She estimates a 50% probability of medium demand, in which case the annual cash flows will be $7 million for 2 years, and a 25% probability of low demand with annual cash flow of $1 million for 2 years. She estimates the appropriate cost of capital is 15%. The risk-free rate is 6%. a. Find the expected NPV. b. Now assume that the expertise gained by taking on the project will lead to an opportunity at the end of Year 2 to undertake a similar venture that will have the same cost as the original project. The new project's cash flows would follow whichever branch resulted for the original project. In other words, there would be an $8 million cost at the end of Year 2 and then cash flows of $13 million, $7 million, or $1 million for Years 3 and 4. Use decision tree analysis to estimate the combined value of the original project and the additional project (but implement the additional project only if it is optimal to do so). Assume the $8 million cost at Year 2 is known with certainty and should be discounted at the risk-free rate of 6%... Qno2. Hart Lumber is considering the purchase of a paper company. Purchasing the company would require an initial investment of $300 million. Hart estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 5 years. The cost of capital for the paper company is 13%. a. Should Hart purchase the paper company? b. While Hart's best guess is that cash flows will be $40 million a year, it recognizes that there is a 50% chance the cash flows will be $50 million a year, and a 50% chance that thecash flows will be $30 million a year. One year from now, it will find out whether the cash flows will be $30 million or $50 million. In addition, Hart also recognizes that if it wanted, it could sell the company at Year 3 for $280 million. Given this additional information, does using decision tree analysis indicate that it makes sense to purchase the papercompany? Again, assume that all cash flows are discounted at 13%. of 6%