c. A variation on part (b): Assume the restaurant faces known fixed costs of $300,000 per year, incurred as long as the restaurant is operating. Thus, Net c$ a7s0h0 f,0lo0w0 == r1e,0ve0n0u,0e0 l0e s−s v3a0r0ia,0b0le0 costs − fixed costs The annual standard deviation of the forecast error of revenue less variable costs is 10.5%.

The interest rate is 10%. Ignore taxes.

Chapter 23 Real Options 689