Question: Let the present value from production be equal to V = 100, and this value can move either up (with factor u = 1.4) or

Let the present value from production be equal to V = 100, and this value can move either up (with factor u = 1.4) or down (with factor d = 1/u) per period. Suppose that at t=3 management has the option to invest 130 million in order to double the value of production. The risk free rate is 2%.

What is the expanded present value of this production facility if management has the opportunity to expand at t = 3?

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