Exhibit Table 1

A proposed plant in China will process soybeans for the local (Chinese new yuan, or ) market. The sales price of a ton of processed soy will be determined by a government panel, and will be known with certainty in one year. The plant must decide whether to begin production today or in one year. The following facts apply to the investment decision.

Initial investment I₀ = 20,000,000 (rises at 10% per year)

Expected sales price per ton P₀ = 50,000 per ton in perpetuity

Actual price P₁ = either 40,000 or 60,000 with equal probability

Variable production cost 40,000 per ton

Fixed production cost 0 per year

Expected production 500 tons per year forever

Tax rate 0%

Discount rate i = 10%

The investment of Exhibit Table 1 is one of ten soybean processing plants that could be constructed in various Chinese provinces. A government panel will set the price of processed soybeans once production has begun. The government panel will not commit to a price until production begins in at least one of the plants. As of today, the investment situation of each plant is identical to that in Exhibit Table 1.

a. Calculate the NPV of investing today as if it were a now-or-never alternative.

b. Calculate the NPV (as of t = 0) of investing in a single plant (and hence revealing the governments price) and then waiting one year before considering further investment.