1) Consider again the Sport Hotel example and Example 9.1. Suppose that if the franchise is accepted the value of the hotel is not $8 million but instead $7.50. Everything else, including first year expenses, is the same as shown in the example. Incorporating the real option, what probability of the franchise being granted would represent a "fair investment?" (that is, a probability such that any higher value would create a positive expected value)
_____%
2) This question is a variant of the Sport Hotel example that was presented in class, in the class notes, and in the Real Option chapter. Suppose that in the example, the first year expenditures that include the purchase of plans and permits is not $1 million but instead $0.7 million. All other aspects of the problem are the same as originally presented. Incorporating these new values, and the real option, what is the new NPV of the project?
$_______ million
3) This question is a variant of the Sport Hotel example that was presented in class, in the class notes, and in the Real Option chapter. Suppose that the value of the hotel is not $8 million but instead is $8.7 million if the city is successful in obtaining the franchise, and is not $2 million but instead is $3.4 if the city is not successful in obtaining the franchise. All other aspects of the problem are the same as originally presented. Incorporating these new values, and the real option, what is the new NPV of the project?
$______ million
4) A distributor of computer software instruction manuals plans to expand distribution. Annual sales are currently $240000 and are expected to be $280000 one year from today. Assuming that expenses are 80% of sales each year, what is the cash flow one year from today if the tax rate is 34%? Assume straight line depreciation of $25,000.
$______
5) A marketing research firm with annual cash inflows of $800 does not expect any growth in annual cash inflows over the next two years. The company, however, anticipates that annual cash outflows, currently at $190 will increase to $250 in year 1 and to $270 in year 2. Assuming the tax rate of 34%, determine the firm's cash flow in YEAR TWO. Assume straight line depreciation of $50 per year.
$________