(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai fusion restaurant. After doing a financial analysis of this venture, you estimate that the initial outlay will be $6 million. You also estimate that there is a 50 percent chance that this new restaurant will be well received and will produce annual cash flows of $760,000 per year forever (a perpetuity), while there is a 50 percent chance of it producing a cash flow of only $200,000 per year forever (a perpetuity) if it isn't received well.

a. What is the NPV of the restaurant if the required rate of return you use to discount the project cash flows is 10 percent?

b. What are the real options that this analysis may be ignoring?

c. Explain why the project may be worthwhile even though you have just estimated that its NPV is negative?

PLEASE ANSWER THE FOLLOWING QUESTIONS REGARDING THE ABOVE QUESTION CORRECTLY:

a. Assume the required rate of return you use to discount the project cash flows is 110%. What is the NPV of the restaurant if things go well?

What is the NPV of the restaurant if things go poorly?

If there is a 50% chance that this new restaurant will be well received and a 50% chance it will not be received well, what is the expected NPV of the restaurant?

b. The real options that this analysis may be ignoring include that Tex-Mex-Thai has the ______?_____ the project if the new restaurant is received well and the ______?______ the project if it is received poorly.

c. "Although the expected NPV is negative, if the firm has the ability to expand on this project if it is received well, then it should be taken on. Since the firm has the option to abandon the restaurant if it is not received well and to expand the restaurant chain if it is received well, these options may cause the project to have positive expected NPV."

Is the statement above true or false?