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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 3 months ago
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