Question

Here is the ORIGINAL data of the Sport Hotel project: 1. Projected outflows First year (Purchase Right, Land, and Permits) Second Year (Construct building shell Third Year: (Finish interior and furnishings) TOTAL $1,000,000 $2,000,000 2,000,000 $5,000,000 2. Projected inflows If the franchise is granted hotel will be worth: If the franchise is denied hotelwill be worth: $8,000,000 when it opened $2,000,000 when it opened. The probability of the city being awarded the franchise is 50% Suppose that everything is the same as in that problem except TWO things: the worth of the hotel, should the city be awarded the franchise, is not $8 million but some unknown smaller number, and the probability of getting the franchise is NOT 50% but is upgraded to 80%. What must the new worth of the hotel when the franchise is granted be in order for the NPV of the Sporthotel project to be equal to exactly zero? a. The value of the hotel should the city be awarded the franchise $5.25 million O b. The value of the hotel should the city be awarded the franchise $4.50 million C. The value of the hotel should the city be awarded the franchise $6.00 millior d. The value of the hotel should the city be awarded the franchise - $6.50 million e. The value of the hotel should the city be awarded the franchise $5 million

Answer 1

In order to NPV is zero then Present value of Cash out flow is equal to present value of Cash inflow.

Here, expected rate return is not mentioned hence ignored.

Total cash outflows are $ 5000000

for NPV zero, cash inflows are also $5000000

So the value of the hotel should the city be awarded the franonchise + $ 5millions