Question

In: Finance

Here is the ORIGINAL data of the Sport Hotel project: 1. Projected outflows First year (Purchase...

Here is the ORIGINAL data of the Sport Hotel project: 1. Projected outflows First year (Purchase Right, Land, and Permits) $1,000,000 Second Year (Construct building shell $2,000,000 Third Year: (Finish interior and furnishings) $2,000,000 TOTAL $5,000,000 2. Projected inflows If the franchise is granted hotel will be worth: $8,000,000 when it opened If the franchise is denied hotel will be worth: $2,000,000 when it opened. The probability of the city being awarded the franchise is 50%. Suppose that everything is the same as in that problem except TWO things: the worth of the hotel, should the city be awarded the franchise, is not $8 million but some unknown smaller number; and the probability of getting the franchise is NOT 50% but is upgraded to 80%. What must the new worth of the hotel when the franchise is granted be in order for the NPV of the Sporthotel project to be equal to exactly zero?

Solutions

Expert Solution

Let W be the the new worth of the hotel when the franchise is granted, so that the NPV of the Sporthotel project to be equal to exactly zero

NPV of the hotel = Probability that franchise is granted x the worth of the hotel, should the city be awarded the franchise + Probability that franchise is not granted x the worth of the hotel, if the city is not awarded the franchise - total cost of the hotel = 80% x W + (1 - 80%) x 2,000,000 - 5,000,000 = 0.80W + 0.20 x 2,000,000 - 5,000,000 = 0.80W - 4,600,000

Setting this to zero,

0.80W - 4,600,000 = 0

Hence, W = 4,600,000 / 0.8 = $  5,750,000 = $ 5.75 mn = $ 6 mn (rounded off to the nearest integer)

Please enter your answer as per requirement.

  • If it's in $, enter 5,750,000 as your answer
  • If it's in $ mn with two places of decimal, enter 5.75
  • If it's in $ mn with integer as answer, enter 6
  • If it's a multiple choice question, please choose: The value of the hotel should the city be awarded the franchise = $ 6 million

jeff jeffy answered 11 months ago
Next > < Previous

Related Solutions

A project has the following projected financial data for its first year of operation. ITEM AMOUNT...
A project has the following projected financial data for its first year of operation. ITEM AMOUNT Sales $500,000 Cost of Goods $200,000 Other expenses $100,000 Depreciation $50,000 Investment in NWC $20,000 Investment in Gross PPE $0 Interest Expense $40,000 If the tax rate for the firm is 30%, what is the project cash flow for the first year based on this information? Question 10 options: $75,000 $107,000 $135,000 $155,000 $205,000
Preparing a project report involves an analysis of financial data to project future cash outflows and...
Preparing a project report involves an analysis of financial data to project future cash outflows and inflows, as well as, a thorough assessment of the following: 1. The project’s potential in the market 2. Its technical feasibility 3. Its environmental impact 4. Its financial feasibility 5. Availability of managerial skills required for the project Why i s a n environmental impact documented in a project report and how can it affect future cash inflows and outflows.
The projected net cash flows for a project are (in $thousands): Year Year 0 Year 1...
The projected net cash flows for a project are (in $thousands): Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $(350) $40 $100 $210 $260 $160 Assuming the initial investment is depreciated over the life of the project, the accounting rate of return for the project is Select one: a. 40% b. 25% c. 48% d. 33%
The projected annual sales of an LED keychain are projected to be 25,000 the first year...
The projected annual sales of an LED keychain are projected to be 25,000 the first year and increase by 10,000 per year until 55,000 are sold during the fourth year. Sales are then predicted to decrease by 5,000 per year in the fifth year and each year therafter until 25,000 are sold in the tenth year. Proposal A is to purchase manufacturing equipment costing $100,000 with an estimated salvage value of $20,000 at the end of 10 years. Proposal B...
The projected balance of inventories at the end of the first year of operations is?
A family friend, Mr. Burn Out availed of the early retirement scheme offered by his employer. He said that he was already tired of the same routine of spending eight full hours in an office doing the same thing for the last twenty years. Mr. Burn Out plans to get into the field of entrepreneurship. He would invest part of his retirement pay in a business that would deal with the sale of medical supplies to local clinics and hospitals....
1. A company purchased equipment  for $60,000 on January 1 of its first year. The equipment’s original...
1. A company purchased equipment  for $60,000 on January 1 of its first year. The equipment’s original estimated useful life is 8 years and its estimated salvage value is $12,000. The company uses the straight-line method of depreciation. On December 31 of its fourth year, before year-end adjusting entries have been recorded, the company decides to extend the estimated useful life 3 years giving it a total life of 11 years. The company did not change the salvage value and continues...
First, BICA is considering the purchase of the Empty Arms hotel. Next year's NOI and cash...
First, BICA is considering the purchase of the Empty Arms hotel. Next year's NOI and cash flow is expected to be $2,000,000 and BIC's economic forecast of market supply and demand and vacancy levels indicated they will continue to be in balance. As a result NOI should increase by 1.5 percent each year based upon expected capital improvements, and BIC believes they should earn 9% total return on the investment. What is the estimated value of the property? What cap...
The projected balance of accounts payable at the end of the first year of operation is?
A family friend, Mr. Burn Out availed of the early retirement scheme offered by his employer. He said that he was already tired of the same routine of spending eight full hours in an office doing the same thing for the last twenty years. Mr. Burn Out plans to get into the field of entrepreneurship. He would invest part of his retirement pay in a business that would deal with the sale of medical supplies to local clinics and hospitals....
The projected balance of accounts receivable at the end of the first year of operations is?
A family friend, Mr. Burn Out availed of the early retirement scheme offered by his employer. He said that he was already tired of the same routine of spending eight full hours in an office doing the same thing for the last twenty years. Mr. Burn Out plans to get into the field of entrepreneurship. He would invest part of his retirement pay in a business that would deal with the sale of medical supplies to local clinics and hospitals....
What is the projected cash balance at the end of the first year of operations?
A family friend, Mr. Burn Out availed of the early retirement scheme offered by his employer. He said that he was already tired of the same routine of spending eight full hours in an office doing the same thing for the last twenty years. Mr. Burn Out plans to get into the field of entrepreneurship. He would invest part of his retirement pay in a business that would deal with the sale of medical supplies to local clinics and hospitals....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT