(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai fusion restaurant. After d
Posted: Sun Apr 17, 2022 6:24 pm
(Real options and capital budgeting) You have come up with a
great idea for a Tex-Mex-Thai fusion restaurant. After doing a
financial analysis of this venture, you estimate that the initial
outlay will be $5.8 million. You also estimate that there is
a 50 percent chance that this new restaurant will be well received
and will produce annual cash flows of $760,000 per year forever
(a perpetuity), while there is a percent chance of it producing a
cash flow of only $200,000 per year forever (a perpetuity) if it
isn't received well.
a. What is the NPV of the restaurant if the required rate of
return you use to discount the project cash flows is
12percent?
b. What are the real options that this analysis may be
ignoring?
c. Explain why the project may be worthwhile even though you
have just estimated that its NPV is negative?
great idea for a Tex-Mex-Thai fusion restaurant. After doing a
financial analysis of this venture, you estimate that the initial
outlay will be $5.8 million. You also estimate that there is
a 50 percent chance that this new restaurant will be well received
and will produce annual cash flows of $760,000 per year forever
(a perpetuity), while there is a percent chance of it producing a
cash flow of only $200,000 per year forever (a perpetuity) if it
isn't received well.
a. What is the NPV of the restaurant if the required rate of
return you use to discount the project cash flows is
12percent?
b. What are the real options that this analysis may be
ignoring?
c. Explain why the project may be worthwhile even though you
have just estimated that its NPV is negative?