Question
Return to the Sport Hotel example in the class notes, discussed in class, and in Chapter 9 of the textbook. This quiz question will use
Return to the Sport Hotel example in the class notes, discussed in class, and in Chapter 9 of the textbook. This quiz question will use the time line and all the figures in this original problem - for example, the costs of building the hotel over three years, the value of the hotel when completed under the two scenarios, and assign as the probability of the city being awarded the franchise the value of 50%. Now consider the following three changes to that original problem (all other aspects of the problem do not change). First, the projected expenditures or outflows in the first year is not as originally given at $1 million but instead is $1.255 million. Second, the projected expenditures or outflows in year 2 is not as originally given as $2 million but instead is $1.745. Third, the probability that the city will be awarded the franchise is not 50% as originally given by instead is 35%. Using these three new values, and incorporating the potential real abandonment option, what would the NPV be at the decision node B on the decision tree?
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