Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Finance
![(21) Application of Real Option Analysis Through the Sport Hotel Project: Rework the NPV
of the Sport Hotel project incorporating two changes: (1) the probability that the city will
be awarded the franchise is 40%, and (2) the building costs in the first year of the project
are not $1 million as originally stated but is $1.5 million instead. All other values are the
same.
[Answer] NPV = $0.10 million
A <
Move forward
1
1
B
1
Franchise is granted ===> C<
Finish
1
Do Not Move Forward
Abandon NPV = -$1.5 million
Finish
Franchise is denied ====> D<
Abandon
NPV = +$2.5 million ($8M-$5.5M)
At Node B: .4*2.5 million +.6* -1.5 million = $0.10 million
At Node A: Accept the project as NPV > 0
NPV = $3.5 million ($2M-$5.5M)
NPV of -$1.5 million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F01d01b29-ede7-42ba-8dcd-8c0b18e94cc8%2Fd5480b8a-0179-4af9-a0aa-69c468c33666%2Fe3lj0cu_processed.jpeg&w=3840&q=75)
Transcribed Image Text:(21) Application of Real Option Analysis Through the Sport Hotel Project: Rework the NPV
of the Sport Hotel project incorporating two changes: (1) the probability that the city will
be awarded the franchise is 40%, and (2) the building costs in the first year of the project
are not $1 million as originally stated but is $1.5 million instead. All other values are the
same.
[Answer] NPV = $0.10 million
A <
Move forward
1
1
B
1
Franchise is granted ===> C<
Finish
1
Do Not Move Forward
Abandon NPV = -$1.5 million
Finish
Franchise is denied ====> D<
Abandon
NPV = +$2.5 million ($8M-$5.5M)
At Node B: .4*2.5 million +.6* -1.5 million = $0.10 million
At Node A: Accept the project as NPV > 0
NPV = $3.5 million ($2M-$5.5M)
NPV of -$1.5 million
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