This question is a variant of the Sport Hotel example that was presented in class, in the class notes, and in the Real Option chapter. Suppose that in the example, the first year expenditures that include the purchase of plans and permits is not $1 million but instead $0.8 million. All other aspects of the problem are the same as originally presented. Incorporating these new values, the probability that the city is awarded the franchise at 50%, and the real option, what is the new NPV of the project? $ million Place your answer in millions of dollars using at least three decimal places. For example, the answer of nine hundred seventy five thousand would be entered as 0.975 and not as 975000. 0 1 2 3 Hotel Completed Begin Hotel Project NHL Makes Franchise Decision For simplicity sake, we'll remove time value from the analysis by assuming that the discount rate is zero. Unrealistic but the calculations become much easier as today's dollars can be added to or subtracted from future dollars. Projected Annual Cash Outflow to Build The Hotel Over 3-Years: In 1-Year: Purchase Rights and Permits, Dig Hotel Foundation In 2-Years: Construct building shell, attach electrical and plumbing In 3-Years: Finish exterior and all interior TOTAL $1 million $2 million $2 million $5 million Projected Present Value from Operating the Hotel in Two Scenarios Scenario #1: Good Case: The City Is Awarded The Franchise: Scenario #2: Bad Case: The City Is Denied The Franchise: $8 million $2 million Hotel NPV: One of Two Values, Either $8M - $5M = $3M or $2M - $5M = -$3M