This assignment represents 20% of your final grade. It should be done in groups of 3-4 persons.

Submission date: Wednesday, August 18, 2022

Question 1

Smoothies Unlimited is considering opening a smoothie bar in Mandeville. The first expenditure is the $25,000,000 investment required to retrofit the location. Based on the analysis, the probabilities are 0.25 that it will be extremely popular, 0.60 that it will be moderately successful and 0.15 that it will not perform well.

If the smoothie bar is extremely popular, operating cash flows of $10 million at the end of years 1, 2 and 3 will be expected. In that case, the company will expand the business at the end of year 3 at a cost of $8,000,000. After the expansion, the probabilities are 0.75 that the subsequent operating cash flows at the end of year 3 will be $16,000,000 , 0.25 that they will be $10,000,000. Each of these cash flow streams would continue in years 4 to 8.

If the smoothie bar is moderately successful, operating cash flows of $6 million per year at the end of years 1 through 8 are expected.

If the smoothie bar is does not perform well, cash flows are expected to be $2,000,000 per year over the 8-year life of the project. If this is the case, Raw Foods will close the smoothie bar at the end of the second year. $8 million of the original investment would be recovered.

a) Draw a decision tree showing the decisions, outcomes and probabilities associated with the new project. [5 marks]

b) Calculate the joint probability and NPV of each path of decision tree. Assume the

required rate of return is 17%.

c) CalculatetheexpectedNPVoftheentireproject.

d) What is the value of the abandonment option?

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e) Should the firm undertake the project?

[20 marks] [4marks] [3 marks] [2 marks]

Question 2

DCF methods are most appropriate for agree?

Rubric

Question 1

Question 2

Authorship Statement APA Presentation (7th ed)

Cover page Table of contents

In-text citations (2)

References

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use in capital investment appraisal. Do you [10 marks]

34 marks 10 marks 1 mark

1 mark

2 marks 2 marks 2 marks 2 marks 54 marks

Financial Manapement 2 Coursework No. 2 This assynment represents 205 of your finaf grave. It should be done n grouse of 34 persons. Submiccon date: Wodvesdoy, Augoat 18 202z Question 1 Smoothies Unimited is considering opering a smocthie bar in Mandewile. The fint expendture is the $28.000.000 invessment requred to retudt fhe location. based on fot analytis. The probabiliet are 025 that an will be extremely popular, 6 \&e that is ail be moderalely sucoestul and 0.15 that if wil het pedorm wel. It the smocthie bar is extremely popular, operakng canh tows of 510 milign at the ond of years 1,2 and 3 we be expected. In that case, the company aili exand to business at the end of year 3 at a cost of 54.000.000. Rher the exparsich, the probabilies are 0.75 that the subsequent pperating cash flows at the end of year 3=1 be 516.000.000, 0.25 that they wil be 510.000.000. Each of these cash foe stearn would continue in years 4 to g. at the end of yean 1 through 8 are expected. IW the smoothie bar is does not perform welt cash flows are expected b be 12006.000 per yoar over the Byose Me of the project. If this is the case, Riaw Foods ail cove the smosthe bar ar the end of the second yar. $8 millon of the ariginal mvestreet ackik be recovered. a) Draw a decision tree showing the decisiona, outcomes and probablifess ansoculted with the new project. I3 maksi] b) Calculate the joint probatilty and NFY of each path of decison tee Assine fie tequired rafe of reharn is 17T. 720 maksl c) Calculate the expected sey of the entre propct. 14 mast? d) What is the value of the abandonment opdicn? 3 maral? e) Should the finm undertake the project? [2 rarkal Question 2 DCF methods are most appropriate for use in capital investment agcraisil. Do you agree? [10 macks]