Question: My calculation is incorrect. Please explain how to find correct answer, if possible, thank you! Thumbs up for correct responses! (Real options and capital budgeting)

My calculation is incorrect. Please explain how to find correct answer, if possible, thank you! Thumbs up for correct responses! My calculation is incorrect. Please explain how to find correct answer, if

(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 $800,000 per year forever (a perpetuity), while there is a 50 percent chance of it producing a cash flow of only $160,000 per year forever (a perpetuity) if it isn't received well What is the NPV of the restaurant if the required rate of retum you use to discount the project cash flows is 10 percent? 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 ne negative? a. Assume the required rate of retum you use to discount the project cash flows is 10% What is the NPV of the restaurant if things go well? 4,000,000 (Round to the nearest dolar)

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!