Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Imagine that a start-up firm plans to open private dining clubs on college campuses. The test market will be your campus, and if the concept

Imagine that a start-up firm plans to open private dining clubs on college campuses. The test market will be your campus, and if the concept proves successful, expansion will follow nationwide. Nationwide expansion will occur in year 4. If the firm expands, it projects opening 20 dining clubs in year 4 around the nation.

The start-up cost of the test dining club is $18000 (this covers leaseholder improvements and other expenses for a vacant restaurant near campus). Assume projected revenues are only sufficient to exactly cover variable and fixed costs (excluding depreciation) and thus the only cashflows over the first 4 years are tax shields from depreciation.

Also assume that the up-front costs can be depreciated in 4 years in a straight-line manner. The volatility of the underlying asset is 30% per annum. The interest rate available is 5% and the tax rate is 34%. What is the value of the option to expand (keep two decimal places)?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

A Study In Public Finance

Authors: A. C. Pigou

1st Edition

1443722766, 978-1443722766

More Books

Students also viewed these Finance questions

Question

Which of the following elements are not associated with taskbars?

Answered: 1 week ago

Question

Approaches to Managing Organizations

Answered: 1 week ago

Question

Communicating Organizational Culture

Answered: 1 week ago