You are trying to decide whether to make an investment of €3…
You are trying to decide whether to make an investment of €300 million in a new technology to produce sugar. There is a 60% chance that the market for these cookies will produce profits of €90 million annually, a 20% chance the market will produce profits of €75 million, and a 20% chance that there will be no profits. The size of the market will become clear one year from now. Currently, the cost of capital of the project is 11% per year. There is a 20% chance that the cost of capital will drop to 9% in a year and stay at that level forever, and an 80% chance that it will stay at 11% forever. Movements in the cost of capital are unrelated to the size of the cookies market. Requested: Construct the decision tree that shows the choices you have to make the investment either today or one year from now. (25 Marks)