Short answer questions Question 2 (20 marks) Submission instructions Write your answers to question 2 on paper and scan your answers to ONE PDF file with multiple pages. Name the PDF file as "Q2_Studenti pot Use the submission box below to submit the PDF file Do not include your answers to other questions in your submission to question 2 Penalty will apply if you fail to follow the instructions Crissy is considering an investment to open a local cafe in the community centre. The suburb is expecting a population surge, after quite a few residential buildings are approved by the council. Crissy hopes that the growth in the population will bring regular sales to the small cafe. The cafe is open between 7:00am and 4.00pm. The operational costs. excluding the lease payments are around 30% of the revenue. Assume this margin does not change with revenue Assume that there is a 60% probability that the annual revenue at the end of the year is $310,000 and 40% probability that it is $250,000 The revenue is not going to change afterwards Crissy can choose to open the cafe today or in one year's time when she is more certain of the annual revenue. If she signs the lease contract today, the annual lease payment is 596,000. W she signs the contract after one years time, the annual lease payment is $109,000. Whether she signs the contract now or in one years time, the tease contract is for 5 years starting from the day when it is signed and cannot be terminated before the contract expires, Ignore any possible cash inflows or outflows after the lease expires. Assume also that the cost to set up the cafe is $100,000 and the caf is subject to a tax rate of 30% She will only invest in the cafe if the net value of the investment over the five year period is higher than $180,000 DE, NPV > $180,000) at the time of the westment. The appropriate cost of capital is 10% pa. Assume all cash flows occur at the end of the year and before the end of the lease contract ca) What is the type of the real option as mentioned above? Draw the decision tree diagram to show all possible decisions and scenarios. Denote the decision nodes and information nodes using different shapes as in the lecture slides Mark the time as well as the possible scenarios with corresponding decision options. You are required to calculate the NPVs in the next two questions so in the decision tree, you can use notations such as V, or V, when necessary (b) Calculate the NPV of the project at t=0 using after tax cash tlows if she opens the cafe today, (ci If she decides to open the cafe one year later, calculate the NPV of the investment respectively at t1 if the revenue is high and if the revenue is low. () Based on your calculation results in (b) and evaluate her choices and make a recommendation No calculation is needed for this part (e) Based on the specifics of the cafe in the question give an example of an abandonment option and describe how it may affect her decision Short answer questions Question 2 (20 marks) Submission instructions Write your answers to question 2 on paper and scan your answers to ONE PDF file with multiple pages. Name the PDF file as "Q2_Studenti pot Use the submission box below to submit the PDF file Do not include your answers to other questions in your submission to question 2 Penalty will apply if you fail to follow the instructions Crissy is considering an investment to open a local cafe in the community centre. The suburb is expecting a population surge, after quite a few residential buildings are approved by the council. Crissy hopes that the growth in the population will bring regular sales to the small cafe. The cafe is open between 7:00am and 4.00pm. The operational costs. excluding the lease payments are around 30% of the revenue. Assume this margin does not change with revenue Assume that there is a 60% probability that the annual revenue at the end of the year is $310,000 and 40% probability that it is $250,000 The revenue is not going to change afterwards Crissy can choose to open the cafe today or in one year's time when she is more certain of the annual revenue. If she signs the lease contract today, the annual lease payment is 596,000. W she signs the contract after one years time, the annual lease payment is $109,000. Whether she signs the contract now or in one years time, the tease contract is for 5 years starting from the day when it is signed and cannot be terminated before the contract expires, Ignore any possible cash inflows or outflows after the lease expires. Assume also that the cost to set up the cafe is $100,000 and the caf is subject to a tax rate of 30% She will only invest in the cafe if the net value of the investment over the five year period is higher than $180,000 DE, NPV > $180,000) at the time of the westment. The appropriate cost of capital is 10% pa. Assume all cash flows occur at the end of the year and before the end of the lease contract ca) What is the type of the real option as mentioned above? Draw the decision tree diagram to show all possible decisions and scenarios. Denote the decision nodes and information nodes using different shapes as in the lecture slides Mark the time as well as the possible scenarios with corresponding decision options. You are required to calculate the NPVs in the next two questions so in the decision tree, you can use notations such as V, or V, when necessary (b) Calculate the NPV of the project at t=0 using after tax cash tlows if she opens the cafe today, (ci If she decides to open the cafe one year later, calculate the NPV of the investment respectively at t1 if the revenue is high and if the revenue is low. () Based on your calculation results in (b) and evaluate her choices and make a recommendation No calculation is needed for this part (e) Based on the specifics of the cafe in the question give an example of an abandonment option and describe how it may affect her decision