You must recommend to a company whether to invest $500 million to produce a new product. The market for this product will yield perpetual net cash flow of $40 m/yr with a 50% probability, $25m/yr with 30% probability, and $10m/yr with a 20% probability. The size of the market will be plain only if you invest in the project and only after the first years sales are realized. If you do not invest, you do not find out the market size. You may sell the whole operation for $300 million in one year if you choose to shut down the product line. The cost of capital for the project is 9% per year.

a) Draw and label a decision tree to analyze this investment.

b) If the company follows the most profitable strategy, what is the fair market value of the investment opportunity?