Here is the ORIGINAL data of the Sporthotel problem: 1. Projected outflows First year (Purchase Right, Land, and Permits) $1,000,000 Second Year (Construct building shell $2,000,000 Third Year: (Finish interior and furnishings) $2,000,000 TOTAL $5,000,000 2. Projected inflows If the franchise is granted hotel will be worth: $8,000,000 when it opened If the franchise is denied hotel will be worth: $2,000,000 when it opened. The probability of the city being awarded the franchise is 50%.
Suppose that everything is the same as in that problem except one thing: the worth of the hotel, should the city be awarded the franchise, is not $8 million but some unknown smaller number. What must the new worth of the hotel when the franchise is granted be in order for the NPV of the Sporthotel project to be equal to exactly zero?
a. The value of the hotel should the city be awarded the franchise = $5 million
b. The value of the hotel should the city be awarded the franchise = $0 million
c. The value of the hotel should the city be awarded the franchise = $6 million
d. The value of the hotel should the city be awarded the franchise = $7 million
e. The value of the hotel should the city be awarded the franchise = $4 million
Assume that everything is the same as in that problem except for two things: the probability that the city will be awarded the franchise is not 50% but is downgraded to 30%, and the third year projected outflow (finish interior and furnishings) is not $2 million but $1 million. Given these two changes, which of the following is true when the franchise is granted?
a. The project’s NPV = $0.75 million
b. The project’s NPV = $0.00 million
c. The project’s NPV = $0.50 million
d. The project’s NPV = $1.00 million
e. The project’s NPV = $0.25 million
Assume that everything is the same as in that problem except for one thing: the first year projected outflow is not $1 million but instead is $1.2 million. Given this change, which of the following is true when the franchise is granted?
a. The project’s NPV = $0.60 million
b. The project’s NPV = $1.00 million
c. The project’s NPV = $0.80 million
d. The project’s NPV = $0.70 million
e. The project’s NPV = $0.90 million