Mini-case: Epilogue of the Clarendon Company

You have been fired from The Clarendon Company since your tenure as CEO was a disaster. However, there are countless opportunities in the air, and you want to put at use your very interesting severance package of 1,000,000 USD.

After doing a great amount of research, you have the following options:

You can build a new Finance App, where you can do project evaluation with very few inputs and allow millions of people to strengthen their decision-making process of their investment. Initial Investment: -800,000 USD Optimistic present value of 5-year Net Cashflows: 3,892,435 USD. Probability: 35% Pessimistic present value of 5-year Net Cashflows: 1,573,985 USD. Probability: 65% You can build your own Tequila Company with a very famous soccer player as a partner. This project will require: Initial Investment: -900,000 USD Optimistic present value of 5-year Net Cashflows: 8,189,663 Probability: 30% Pessimistic present value of 5-year Net Cashflows: -296,836 USD. Probability: 70% You can invest your money on the real estate industry, building a new property on a yearly basis. Initial Investment: -1,000,000 USD Optimistic present value of 5-year Net Cashflows: 6,381,160 Probability: 50% Pessimistic present value of 5-year Net Cashflows: -1,519,408 USD. Probability: 50% All projects consider a 5 year timeline. The minimum required rate of return (TREMA) is 12%.

What is the NPV of the best option, by weighting scenarios with a decision tree? (Remember: NPV = Initial Investment + PV of Cashflows)