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The MBA Cohort 2020 EVENT Center has grown rapidly. The owners met when taking MBA classes together and decided to go into business together by opening an event center which was a much needed addition to their area. The event center has grown rapidly and become the place to book for events. The largest portion of their bookings (80%) has been for weddings. They are considering a few projects that will enhance or expand their offerings. Project 1: On site food service The center has been having the food for all events brought to the center by private caterers, they are now trying to decide whether to add on site food service facilities. The cost would be $11 million in Year 0. There is a 50% chance that the addition of on site food services will be hugely successful and generate annual after-tax cash flows of $7 million per year during years 1, 2 &3. However, there is a 50% chance the project would be less successful and would generate only $1 million per year for the 3 years. If this project is successful, it would open the door to another investment which would require an outlay of $8 million at the end of year 2. The $8 million investment would then be sold to another center at a price of $16 million at the end of year 3. The WACC for this project would be 9%. What is the NPV if the company does not consider real options? What is the project's NPV with the growth option? What is the value of the growth option? What is the projects IRR? Would you recommend going ahead with this project? The MBA Cohort 2020 EVENT Center has grown rapidly. The owners met when taking MBA classes together and decided to go into business together by opening an event center which was a much needed addition to their area. The event center has grown rapidly and become the place to book for events. The largest portion of their bookings (80%) has been for weddings. They are considering a few projects that will enhance or expand their offerings. Project 1: On site food service The center has been having the food for all events brought to the center by private caterers, they are now trying to decide whether to add on site food service facilities. The cost would be $11 million in Year 0. There is a 50% chance that the addition of on site food services will be hugely successful and generate annual after-tax cash flows of $7 million per year during years 1, 2 &3. However, there is a 50% chance the project would be less successful and would generate only $1 million per year for the 3 years. If this project is successful, it would open the door to another investment which would require an outlay of $8 million at the end of year 2. The $8 million investment would then be sold to another center at a price of $16 million at the end of year 3. The WACC for this project would be 9%. What is the NPV if the company does not consider real options? What is the project's NPV with the growth option? What is the value of the growth option? What is the projects IRR? Would you recommend going ahead with this project
