Your firm is thinking of expanding. If you investtoday,the expansion will generate$10million in FCF at the end of theyear,and will have a continuation value of either$150million(ifthe economyimproves)or$50million(ifthe economy does notimprove).If you wait until next year toinvest,you will lose the opportunity to make$10million in FCF but you will know the continuation value of the investment in the following year(thatis, in a year from now you will know what the investment continuation value will be in the followingyear).Suppose therisk-freerate is5%,and therisk-neutralprobability that the economy improves is45%. Assume the cost of expanding is the same this year or next year.

a. If the cost of expanding is$80million,should you do sotoday,or wait until next year todecide?

b. At what cost of expanding would there be no difference between expanding now andwaiting?To what profitability index does thiscorrespond?

a. If the cost of expanding is$80million,should you do sotoday,or wait until next year todecide?

The NPV of theexpand-nowoption is$_________million.(Roundto two decimalplaces.)

What is the NPV of thewait-a-yearoption?$_________million.(Roundto two decimalplaces.)

It is optimal to Wait a year to expand now?

b. At what cost of expanding would there be no difference between expanding now andwaiting?To what profitability index does thiscorrespond?

The cost at which there will be no difference between expanding now and waiting is$___________million.(Roundto two decimalplaces.)What is the profitabilityindex?The profitability index is __________.(Roundto three decimalplaces.)