Here is the ORIGINAL data of the Sporthotel problem: 1. Projected outflows First
ID: 2782784 • Letter: H
Question
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%. 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?
The project’s NPV = $0.70 million
The project’s NPV = $0.80 million
The project’s NPV = $1.00 million
The project’s NPV = $0.60 million
The project’s NPV = $0.90 million
a.The project’s NPV = $0.70 million
b.The project’s NPV = $0.80 million
c.The project’s NPV = $1.00 million
d.The project’s NPV = $0.60 million
e.The project’s NPV = $0.90 million
Explanation / Answer
Answer:
NPV=(After tax cash flow/(1+r)^t) - Initial investment
when franchise granted
Initial investment=$5.2 million
Inflow=$8 million
NPV= $5.2 million/$8 million=$0.65 million
The answer is d