Suppose you want to open a restaurant. The initial cost will be $3,500,000 and you require a return of 20%. You expect cash flows to be $625,000 in perpetuity. Q1: What is the NPV? The expectation of $625,000 came from the following. You project cash flows to be either $800,000 or $450,000 in perpetuity. Both outcomes have a 50% probability of occurring. Q2: Compute the NPV of the optimistic and pessimistic forecast. Q3: Based on what we know, should you accept or reject the project?
Suppose you want to open a restaurant. The initial cost will be $3,500,000 and you require a return of 20%. You expect cash flows to be $625,000 in perpetuity. Q1: What is the NPV? The expectation of $625,000 came from the following. You project cash flows to be either $800,000 or $450,000 in perpetuity. Both outcomes have a 50% probability of occurring. Q2: Compute the NPV of the optimistic and pessimistic forecast. Q3: Based on what we know, should you accept or reject the project?
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
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Transcribed Image Text:Option to expand
Suppose you want to open a restaurant. The initial cost will be $3,500,000 and you
require a return of 20%. You expect cash flows to be $625,000 in perpetuity.
Q1: What is the NPV?
The expectation of $625,000 came from the following. You project cash flows to be
either $800,000 or $450,000 in perpetuity. Both outcomes have a 50% probability of
occurring.
Q2: Compute the NPV of the optimistic and pessimistic forecast.
Q3: Based on what we know, should you accept or reject the project?
If the optimistic forecast bears out, you will expand the number of locations. Suppose you
will expand to 10 restaurants.
Q4: What is the NPV, accounting for the option to expand?
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