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Starbucks new projects cash flows depend critically upon customer acceptance of the in home coffee maker. They will either love it, or hate it. Year

Starbucks new projects cash flows depend critically upon customer acceptance of the in home coffee maker. They will either love it, or hate it. Year 0 costs remain the same, as for the original business case. The WACC remains 7.2%.

There is a 70% probability that the product will be wildly successful and produce CFs of $250,000 a year for the 5 years, and a 30% chance it will produce annual CFs of -$50,000.

Assume that the managers have a real option of abandoning the project after year 1 if it is not doing well.

Use the information in part IV of the Information document to answer this question.

35. Assuming that the managers of Starbucks use a real option to abandon the project if it is not well received, what is the NPV if the project is abandoned? (you will have cash flows in year 0 and year 1)

A.

-$349,889

B.

-$677,141.79

C.

-$659,083

D.

-$897,445

QUESTION 36

  1. Use the information in part IV of the Information document to answer this question.

    Assuming that the managers of Starbucks use a real option to abandon the project if it is not well received.

    What is the NPV if the project is loved by customers?

    A.

    $372,161.21

    B.

    $367,344.33

    C.

    $389,083.47

    D.

    $897,445.22

QUESTION 37

  1. Use the information in part IV of the Information document to answer this question.

    Assuming that the managers of Starbucks use a real option to abandon the project if it is not well received.

    What is the expected NPV of the project using the probabilities provided for the two potential outcomes?

    A.

    $2,161.92

    B.

    $37,344.17

    C.

    $59,083.65

    D.

    $69,215.89

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