(1) Traditional NPV Analysis: NPV = $ ______million

Decision based on Traditional NPV?

(2) Real Options NPV Analysis: ($ million)

• Scenario 1 (Popular, ): NPV1 = ______
• Scenario 2 (Unpopular, ): NPV2 = _________
• Combined Real Options NPV = ________ x + ________x = _________
• Net value of waiting = ________ - _________= ___________

1. Consider a simple 1-year gym space rental and lease contract for weight and cardio equipment by LA Fitness. LA Fitness is planning a new fitness center in downtown near Quinlan School of Business at WTC where the next year will determine whether the demand and club membership sales would be high (popular, $6 million) or low (unpopular, $2 million) at the new location mainly depending on the COVID-19 vaccination of Loyola's faculty and students by the end of Fall 2021. As of May 1st, 2021, the two potential outcomes appear equally likely (1/2 and 1/2). The total cost of gym space rental and lease on weight and cardio equipment is $3 million, and a contract of this risk calls for a discount rate of 10% for LA Fitness. (1) Undertake traditional NPV analysis and (2) calculate real options NPV and the net value of waiting (i.e., retaining flexibility). (3) What would you recommend for LA Fitness to do in this situation? Discuss potential risks of your recommendation. Traditional NPV Year Real Options NPV Scenario 1 (Popular 12) Scenario 2 (Unpopular 12) Current Probabilities 2021 -3M 2022 6M X 12 + 2M x 12 -3M -3M 2023 6M 2M 1. Consider a simple 1-year gym space rental and lease contract for weight and cardio equipment by LA Fitness. LA Fitness is planning a new fitness center in downtown near Quinlan School of Business at WTC where the next year will determine whether the demand and club membership sales would be high (popular, $6 million) or low (unpopular, $2 million) at the new location mainly depending on the COVID-19 vaccination of Loyola's faculty and students by the end of Fall 2021. As of May 1st, 2021, the two potential outcomes appear equally likely (1/2 and 1/2). The total cost of gym space rental and lease on weight and cardio equipment is $3 million, and a contract of this risk calls for a discount rate of 10% for LA Fitness. (1) Undertake traditional NPV analysis and (2) calculate real options NPV and the net value of waiting (i.e., retaining flexibility). (3) What would you recommend for LA Fitness to do in this situation? Discuss potential risks of your recommendation. Traditional NPV Year Real Options NPV Scenario 1 (Popular 12) Scenario 2 (Unpopular 12) Current Probabilities 2021 -3M 2022 6M X 12 + 2M x 12 -3M -3M 2023 6M 2M