The Pacific Food Company (PFC) has created a new concept restaurant that serves low-calorie healthy pizza at competitive prices. The restaurant costs $1.2 million to launch and is expected to generate a free-cash-flow stream with a present value of $1 million and a volatility of 30 percent. Identical restaurants can be opened in one year at the same cost and with the same present value. The risk-free rate is 5 percent.

a. Should PFC open a restaurant now? Explain your answer.

b. A private equity firm has offered $2.3 million to buy the concept and the exclusive right to open health pizza restaurants across the country. How many restaurants should the private equity firm open in one year to justify the $2.3 million offer?