Option to expand the branch: The original project was: New Food Inc. plans to open a new a new restaurant in North Dakot

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Option To Expand The Branch The Original Project Was New Food Inc Plans To Open A New A New Restaurant In North Dakot 1 (99.29 KiB) Viewed 19 times

Option to expand the branch: The original project was: New Food Inc. plans to open a new a new restaurant in North Dakota. The initial costs of opening the business is $7.6 million. The firm estimates a 33% probability of high demand for the new food. In this case New Food Inc. will receive annual cash flows of $12.5 million for the next 2 years. The firm estimates a 45 probability of medium demand. In this case the company expects to receive annual cash flows of $6.0 for 2 years. There is also possible that the demand will be low and the annual cash flows will be only $1.1 million for 2 years. Option to expand the project: Now the company evaluating the possibility to expand the project if the original project is successful. The company plans to invest another $7.6 million at the end of year 2 (beginning of year 3) of the project to receive the same cash flows of $12.5 million for additional 2 years (years 3 and 4) in the case of high demand or to get $6.0 million for additional 2 years (years 3 and 4) in the case of medium demand. However, if the project was not successful during the first 2 years, the company will not expand the project for additional 2 years. The company's cost of capital is 10.63 percent. Probability 33% 45% Please calculate it Cash Flow Cash Flow Year 1 Year 2 in millions in millions 12.5 6.0 1.1 12.5 6.0 1.1 Cash Flow Year 3 in millions 12.5 6.0 $0 Cash Flow Year 4 in millions 12.5 6.0 $0 Calculate expected PV of future cash flows of the project. Calculate the answer in millions. Round the answer to two decimals.