Your firm is considering investing $6.5 million in a factory to build home ethanol systems that will allow individuals to create ethanol from grass clippings. There is an 80% chance that the technology will work as planned and expected net cash flows will be $1 million per year and a 20% chance of technical problems that will reduce expected net cash flows to $35,000 per year. Either way, net cash flows would begin a year from today and continue for 20 years. Alternatively, in two years, your firm will know whether the technology will work and thus whether net cash flows will be $1 million or $35,000 per year. Should your firm build now or wait two years if the required return on the project is 10% per year?

Calculate the NPV along each path of your decision tree for the project.

Develop the probability distribution of the project's NPV.

Calculate the project's expected NPV.