You are considering buying a business. The business is expected to generate free cash flows of 1 million per year perpetually. However, there is a 40% probability that the cash flows will increase to 2 million per year after the first year. At the end of one year, it will be known whether the cash flows will increase.

You have the following options:

a. Dont buy the business at all.

b. Buy the business now for 15 million.

c. Pay 2 million now for the option to buy the business for 15 million in one year. The cost of capital is 8%.

4. Calculate the NPV utilizing the optimal strategy.

5. Suppose the price for the business, whether you buy it now or one year from now, is x instead of 15 million, and the option costs 2 million. Calculate the highest value of x for which you would buy the business now.