Question
Tricia McMillan, the owner of a pizza parlor near a large university campus, is considering opening a shop specializing in quick, inexpensive take-out meals that
Tricia McMillan, the owner of a pizza parlor near a large university campus, is considering opening a shop specializing in quick, inexpensive take-out meals that are low in fat and calories. She will use a vacant space adjacent to the pizza parlor. The project would require an initial cash outlay of $1600 thousand. Finance students from the university have taken on the project as a course assignment. The students believe that there is a 45% chance that the project will have modest success and return $90 thousand per year in perpetuity. On the other hand, the remaining probability is that the project will be successful and produce returns of $210 thousand per year in perpetuity. If the new restaurant is only modestly successful, Tricia will keep it open but not expand. If it is successful, she will open 4 more shops at sites close to the sprawling campus the following year. The additional shops would have the same costs and expected future cash flows as the first one. What is the expected NPV of the project (in $ thousands, rounded to one decimal place, e.g., 12.3) including the option to expand, given a discount rate of 10%?
The answer should be 960.0
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started