1. This question is a variant of the Sport Hotel example. Suppose that the value of the hotel is not $8 million but instead is $9.5 million if the city is successful in obtaining the franchise, and is not $2 million but instead is $3.7 if the city is not successful in obtaining the franchise. All other aspects of the problem are the same as originally presented. Incorporating these new values, and the real option, what is the new NPV of the project?

2. Suppose that in the example, the first year expenditures that include the purchase of plans and permits is not $1 million but instead $1.5 million. All other aspects of the problem are the same as originally presented. Incorporating these new values, and the real option, what is the new NPV of the project?

3. Suppose that if the franchise is accepted the value of the hotel is not $8 million but instead $8.25. Everything else, including first year expenses, is the same as shown in the example. Incorporating the real option, what probability of the franchise being granted would represent a "fair investment?" (that is, a probability such that any higher value would create a positive expected value)

4. Suppose that everything stays the same as was presented in the original problem, except one thing -- the value of the hotel, should the city be awarded the franchise, is not $8 million but instead is $5.90 million. Using this new value, what would the NPV be at the decision node B on the decision tree?

(9) The Sporthotel - Traditional NPV: Hyatt International is now deciding whether or not to build a hotel next to a soon to be built state-of-the-art hockey arena. The hotel is in a city that is one of three vying for an NHL franchise. Hyatt's plan is for the property to be the official hotel of the team. The NHL will announce their franchise decision in exactly one year. If the franchise is granted, the games will begin two years from that point in time, or three years from today. To be the official hotel, the property must be ready for guests when the first game is played. It takes exactly three vears to build the hotel. 2 Begin The Hotel Project NHL Makes Franchise Decision Hotel Building Continues Hotel Completed For simplicity sake, we'll remove time value from the analysis by assuming that the discount rate is zero. Unrealistic yes, but the calculations become easier. Question: Does the hotel have a positive or negative NPV? Answer! With a 50% chance that the city gets the franchise, NPV-80 1. Projected outflows from the hotel project (all figures in millions of dollars) First year (Purchase Right, Land, and Permits) Second Year (Construct building shell Third Year: (Finish interior and furnishings) TOTAL $1 $2 $2 $5