Question
In: Finance
(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai...
(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 $5.7 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 $780,000 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.
a. What is the NPV of the restaurant if the required rate of return 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 negative?
Solutions
jeff jeffy answered 2 years agoRelated Solutions
(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai...
(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 $5.7 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 $760,000 per year forever (a
perpetuity), while there is a 50 percent chance of it producing a
cash flow...
You have come up with a great idea for a Tex-Mex-Thai fusion restaurant. After doing a...
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 $5.7 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
$840,000 per year forever (a perpetuity), while there is a 50
percent chance of it producing a cash flow of only $160,000 per
year...
Related to Checkpoint 13.5) (Real options and capital budgeting) You are considering introducing a new...
Related to Checkpoint 13.5) (Real
options and capital budgeting) You are considering
introducing a new Tex-Mex-Thai fusion restaurant. The initial
outlay on this new restaurant is
$6.96.9
million and the present value of the free cash flows (excluding
the initial outlay) is
$5.35.3
million, such that the project has a negative expected NPV
of
$1.61.6
million. Upon closer examination, you find that there is a
5555
percent chance that this new restaurant will be well received
and will produce...
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1. You manage a local tex-mex restaurant called “Garage Taco Bar.” You have recently switched all...
1.
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You have recently switched all of your business to takeout due to
the pandemic and you want to make sure you are still making enough
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Make up a company (it could be real or fictional) and make
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