Question
Return to the Sport Hotel project that was introduced in Topic 6 of the course notes and also in Chapter 9 on real options. Consider
Return to the Sport Hotel project that was introduced in Topic 6 of the course notes and also in Chapter 9 on real options. Consider the original data as was given in the problem (please refer to either your textbook or the course notes should you need to be reminded of these data). Suppose that everything is the same as in that original set-up example except two things: (1) the cost of building the hotel in Year 1 is not $1,000,000 as in the original set-up but $500,000 instead, and (2) cost of building the hotel in Year 2 is not $2,000,000 as in the original set-up but $2,500,000 instead. Given these two changes, given that the probability of the city being awarded the franchise is 50%, and incorporating the real option into the analysis, which of the following is closest to the project's NPV?
A. NPV = -$1,000,000
B. NPV = $100,000
C. NPV = $1,250,000
D. NPV = -$75,000
E. NPV = $1,000,000
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