You are considering to open a coffee shop. You would need to buy a property refurbish it . Initial investment would be 4,5 million e. Once you have opened you will observe the demand. If the demand is high you will receive net clash flows 0.5 million a year forever. if demand is low then you will get 0.25 million forever. Propability for hight demand is 60% and for low 40%. Discout rate is 10%.
a. What is the NPV of this investment opportunity?
B. now consider that after you observe low demand you have choise to do nothing and keep gettin 0.25 million forever every year or you could redecorate property for 0.5 million as rent it out as an office space for 0.4 million per year forever (starting at year 2). What choise will you make?
c. What is the NPV of the project now?