This question relates to the Sporthotel problem we covered in class (and is also in your textbook and course workbook). In the original problem, your firm would build a hotel that would either be worth $8m if the franchise is awarded or $2m if the franchise was denled. Additionally, the hotel would incur $1m of cost in year 1 followed by $2m in year 2 and $2m in year 3 . Let's consider the following changes to the original problem. If the franchise is awarded, the hotel will be worth 9.50 instead of $8m and if denied the franchise, the hotel will only be worth 3.70. Additionally, the costs in incurred in the first year will be 1.50 but the costs in year 2 and 3 will remain the same. All other aspects of the problem are the same as originally presented, such as the costs per year. Assume that the probability of obtaining the franchise is 40%. Incorporating these new hotel values from above, and the real option, what is the new NPV of the project? $0.52 $6.02 $1.00 $5.02 $0.70 Return to the Sport Hotel example in the class notes, discussed in class, and in Chapter 9 of the textbook. This exam question will use the time line and all the figures in this original problem - for example, the costs of building the hotel over three years, the value of the hotel when completed under the two scenarios, and the probability of the city being awarded the franchise. The ARIGINAL information of the Sport Hotel problem was: The probability of the city being awarded the franchise was estimated to be 50% 16. Suppose that the following two things from the original problem change: (1) the probability of being awarded the franchise drops from 50% to 30%, and the value of the hotel, should the franchise not be awarded to the city, is not $2 million but $1.8 million. Incorporating the real option, and given these two changes, which of the following is closest to the NPV of the Sporthotel project at Node B? A. NPV=$1.0 Million B. NPV=$0.9 Million C. NPV=$0.5 Million D. NPV=$0.2 Million E. NPV=$0.0 Million 17. Return to the original Sport Hotel problem (that is, do not incorporate the two changes from problem 16, and suppose that the first year outflow is not $1 million but $2 million. Incorporating the real option, and given this change, which of the following is closest to the NPV of the Sport Hotel project at Node B? A. NPV =$1.0 Million B. NPV=$0.9 Million C. NPV=50.5 Million D. NPV =$.2 Million E. NPV =$0.0 Million