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Return to the Sport Hotel example in the course notes, the lesson, and in Chapter 9. Suppose that everything stays the same as was presented in the original problem, except one thing - the value of the hotel, should the city be awarded the franchise, is not $8 million but instead is $6.00 million. Using this new value of the hotel; what is the NPV of the project assuming that the probability of the city being awarded the franchise is 30% ? million Place your answer in millions of dollars using three decimal places. For example, the answer of nine hundred and seventy five thousand would be entered as 0.975 This question is a variant of the Sport Hotel example that was presented in class, in the class notes, and in the Real Option chapter. Suppose that in the example, the first year expenditures that include the purchase of plans and permits is not $1 million but instead $1.6 million. All other aspects of the problem are the same as originally presented. Incorporating these new values, the probability that the city is awarded the franchise at 50%, and the real option, what is the new NPV of the project? milion (18) Application of Real Option Analysis through The Sport Hotel Project: Hyatt International is considering building a hotel next to a new hockey arena in a city that is 1 of 3 vying for a new NHL franchise. The NHL will announce which city will be awarded the franchise in one year, and that team will begin playing three years from today. Because Hyatt would like to be the official hotel of the NHL team, the property must be ready for guests when the first game is played in three years. It takes three years to build the hotel. What is the project's NPV? For simplicity sake, we'll remove time value from the analysis by assuming that the discount rate is zero. Unrealistic but the calculations become much easier as today's dollars can be added to or subtracted from future dollars. Projected Annual Cash Outflow to Build The Hotel Over 3-Years: In 1-Year: Purchase Rights and Permits, Dig Hotel Foundation In 2-Years: Construct building shell, attach electrical and plumbing In 3-Years: Finish exterior and all interior TOTAL $1million$2million$2million$5million Projected Present Value from Operating the Hotel in Two Scenarios Scenario \#1: Good Case: The City Is Awarded The Franchise: Scenario \#2: Bad Case: The City Is Denied The Franchise: $8 million $2 million Hotel NPV: One of Two Values, Either $8M$5M=$3M or $2M$5M=$3M Decision: Based on our analysis the NPV will either be positive $3 million (good case) negative $3 million (bad case). What should Hyatt do? Determine the probability of the getting the franchise, and then work that into the NPV. It turns out that 50% becomes the tipping point. In other words, if Hyatt believes that probability of the city being awarded the franchise is greater than 50% the NPV wil positive. However, if less than 50%, the NPV will be negative. For example, let's 100 two different probabilities of getting the franchise: Probability =51%:NPV=.51($3 million )+.49($3 million )=$0.06 million Probability =49%:NPV=.49($3 million )+.51($3 million )=$0.06 million Return to the Sport Hotel example in the course notes, the lesson, and in Chapter 9. Suppose that everything stays the same as was presented in the original problem, except one thing - the value of the hotel, should the city be awarded the franchise, is not $8 million but instead is $6.00 million. Using this new value of the hotel; what is the NPV of the project assuming that the probability of the city being awarded the franchise is 30% ? million Place your answer in millions of dollars using three decimal places. For example, the answer of nine hundred and seventy five thousand would be entered as 0.975 This question is a variant of the Sport Hotel example that was presented in class, in the class notes, and in the Real Option chapter. Suppose that in the example, the first year expenditures that include the purchase of plans and permits is not $1 million but instead $1.6 million. All other aspects of the problem are the same as originally presented. Incorporating these new values, the probability that the city is awarded the franchise at 50%, and the real option, what is the new NPV of the project? milion (18) Application of Real Option Analysis through The Sport Hotel Project: Hyatt International is considering building a hotel next to a new hockey arena in a city that is 1 of 3 vying for a new NHL franchise. The NHL will announce which city will be awarded the franchise in one year, and that team will begin playing three years from today. Because Hyatt would like to be the official hotel of the NHL team, the property must be ready for guests when the first game is played in three years. It takes three years to build the hotel. What is the project's NPV? For simplicity sake, we'll remove time value from the analysis by assuming that the discount rate is zero. Unrealistic but the calculations become much easier as today's dollars can be added to or subtracted from future dollars. Projected Annual Cash Outflow to Build The Hotel Over 3-Years: In 1-Year: Purchase Rights and Permits, Dig Hotel Foundation In 2-Years: Construct building shell, attach electrical and plumbing In 3-Years: Finish exterior and all interior TOTAL $1million$2million$2million$5million Projected Present Value from Operating the Hotel in Two Scenarios Scenario \#1: Good Case: The City Is Awarded The Franchise: Scenario \#2: Bad Case: The City Is Denied The Franchise: $8 million $2 million Hotel NPV: One of Two Values, Either $8M$5M=$3M or $2M$5M=$3M Decision: Based on our analysis the NPV will either be positive $3 million (good case) negative $3 million (bad case). What should Hyatt do? Determine the probability of the getting the franchise, and then work that into the NPV. It turns out that 50% becomes the tipping point. In other words, if Hyatt believes that probability of the city being awarded the franchise is greater than 50% the NPV wil positive. However, if less than 50%, the NPV will be negative. For example, let's 100 two different probabilities of getting the franchise: Probability =51%:NPV=.51($3 million )+.49($3 million )=$0.06 million Probability =49%:NPV=.49($3 million )+.51($3 million )=$0.06 million