Reference no: EM132664114

You are currently considering building a new factory. The factory will cost $400 million to produce. In one year's time (year 1), it will generate a revenue of $2 billion if it is successful, and a revenue of $300 million if it fails (assuming all revenue from the factory production will be realised in year 1). If the factory is a success, you have the option to build a second plant which will cost $500 million in year 1. In year 2, you will have a revenue of $3.0 billion if the second factory is a success and a revenue of $1B million otherwise. The first factory has a 50% chance of succeeding and a 50% chance not succeeding. If the first factory is successful, the chance of the second plant being a success is 75%. Assuming the cost of capital is 10%. Should you build the first factory? Should you build the second plant? Draw a decision tree and show all calculations.