Here is the ORIGINAL data of the Sport Hotel project: 1. Projected outflows Firs
ID: 2615244 • Letter: H
Question
Here is the ORIGINAL data of the Sport Hotel project: 1. Projected outflows First year (Purchase Right, Land, and Permits) Second Year (Construct building shell Third Year: (Finish interior and furnishings) TOTAL $1,000,000 $2,000,000 2,000,000 $5,000,000 2. Projected inflow:s If the franchise is granted hotel will be worth: If the franchise is denied hotelwill be worth: $8,000,000 when it opened $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 TWO things: the worth of the hotel, should the city be awarded the franchise, is not $8 million but some unknown smaller number; and the probability of getting the franchise is NOT 50% but is upgraded to 80%. 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 - $5.25 milliorn ?? The value of the hotel should the city be awarded the franchise $4.50 million C. The value of the hotel should the city be awarded the franchise = $6.00 million d. The value of the hotel should the city be awarded the franchise $6.50 million e. The value of the hotel should the city be awarded the franchise $5 million O c.Explanation / Answer
cost of capital has not been provided and also no any other discount rate has been given. So assuming 10% as discount rate and performing calculations and assuming the franchise is given at t=0.
SO we get option(b) as correct after doing calcualtions for the outflows at t=0 and considering the given probabilities.