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