Memphis Restaurants has come up with a new fast casual restaurant combining some of the features consumers like in Delicatessen, Quick, and Hippopotamus, but it is not quite sure how the public in Germany will react to it. Memphis feels that there is a 50-50 chance that consumers will like it and a 50-50 chance that they won’t. They are considering building one of these new restaurants and the cash flows if it succeeds and fails are given below.

The required rate of return is 10 percent. What is the NPV of the project if it is successfully received? What is the NPV if it is unsuccessfully received? Now determine the expected NPV from taking on this project given the fact that it has a 50-50 chance of success? If the project is well received by the public, Memphis expects build 20 more of these restaurants. The cash flows from these projects will be identical to the cash flows from the successful outcome with the initial outlay occurring in year 1 rather than year 0 followed by four annual cash flows of €40,000 each. The 1-year delay for the expansion restaurants is a result of the fact that it will take 1 year to gauge how the public responds to the new restaurant. If it is not well received, then the project will be abandoned after year 4. What is the NPV of the project assuming that 20 additional of these restaurants will be built?

Transcribed Image Text:

YEAR 0 1 2 3 4 50% CHANCE OF SUCCESS CASH FLOW - 120,000 40,000 40,000 40,000 40,000 YEAR 0 1 2 3 st 50% CHANCE OF FAILURE CASH FLOW - 120,000 10,000 10,000 10,000 10,000