Imagine that a start-up firm plans to open private dining clubs on college campuses. The test market will be your campus
Posted: Sun Jun 05, 2022 7:29 am
Imagine that a start-up firm plans to open private dining clubs
on college campuses. The test market will be your campus, and if
the concept proves successful, expansion will follow nationwide.
Nationwide expansion will occur in year 4. If the firm expands, it
projects opening 20 dining clubs in year 4 around the nation. The
start-up cost of the test dining club is $14000 (this covers
leaseholder improvements and other expenses for a vacant restaurant
near campus). Assume projected revenues are only sufficient to
exactly cover variable and fixed costs (excluding depreciation) and
thus the only cashflows over the first 4 years are tax shields from
depreciation. Also assume that the up-front costs can be
depreciated in 4 years in a straight-line manner. The volatility of
the underlying asset is 30% per annum. The interest rate available
is 5% and the tax rate is 34%. What is the value of the option to
expand (keep two decimal places)?
on college campuses. The test market will be your campus, and if
the concept proves successful, expansion will follow nationwide.
Nationwide expansion will occur in year 4. If the firm expands, it
projects opening 20 dining clubs in year 4 around the nation. The
start-up cost of the test dining club is $14000 (this covers
leaseholder improvements and other expenses for a vacant restaurant
near campus). Assume projected revenues are only sufficient to
exactly cover variable and fixed costs (excluding depreciation) and
thus the only cashflows over the first 4 years are tax shields from
depreciation. Also assume that the up-front costs can be
depreciated in 4 years in a straight-line manner. The volatility of
the underlying asset is 30% per annum. The interest rate available
is 5% and the tax rate is 34%. What is the value of the option to
expand (keep two decimal places)?