Option to expand the branch:

The original project was: New Food Inc. plans to open a new a new restaurant in North Dakota. The initial costs of opening the business is $10.0 million. The firm estimates a 22% probability of high demand for the new food. In this case New Food Inc. will receive annual cash flows of $14.2 million for the next 2 years. The firm estimates a 52 probability of medium demand. In this case the company expects to receive annual cash flows of $6.4 for 2 years. There is also possible that the demand will be low and the annual cash flows will be only $1 million for 2 years.

Option to expand the project: Now the company evaluating the possibility to expand the project if the original project is successful. The company plans to invest another $10.0 million at the end of year 2 (beginning of year 3) of the project to receive the same cash flows of $14.2 million for additional 2 years (years 3 and 4) in the case of high demand or to get $6.4 million for additional 2 years (years 3 and 4) in the case of medium demand. However, if the project was not successful during the first 2 years, the company will not expand the project for additional 2 years.

The company is absolutely certain about the size of the additional investment at the end of year 2, so the management is using risk-free rate as a discount rate for the costs of the project.

Risk free rate is 4.25 percent.

The company's cost of capital is 10.88 percent.

Calculate expected NPV of the expanded project.

The correct answer should be 3.71

Probability	Cash Flow Year 1 in millions	Cash Flow Year 2 in millions	Cash Flow Year 3 in millions	Cash Flow Year 4 in millions
22%	14.2	14.2	14.2	14.2
52%	6.4	6.4	6.4	6.4
Please calculate it	1	1	$0	$0

Initial outlay at time point 0 in millions	Probability	Additional Investment at the end of year Year 1 in millions	Additional Investment at the end of Year 2 in millions
	22%	$0	$10.0
$10.0	52%	$0	$10.0
	Please calculate it	$0	$0