Joe Avery recently graduated from college and has an idea for a juice shop using only organic and locally-sourced ingredients. He has saved just enough money to cover the initial investment required to open the shop, $40,000. Using his corporate finance training, he estimates that the free cash flow from the shop will be $10,000 per year, forever. Investments with similar risk deliver a rate of return of 12%. The NPV of the project would be $43,333. In fact, the annual cash flow of $10,000 is an expected value: there is a 50% chance that annual cash flow will be $25,000 and a 50% chance that it will be -$5,000. Because of a very restrictive leasing contract, he cannot close down the shop even if there is no demand. The expected NPV of this project would be $43,333, it does not change.

Fortunately, Joe's rich relatives are willing to provide him with enough capital to open another 8 shops after the first year if there is a lot of demand.

What is the true NPV of the project?

What is the value of the option to expand?