Question

Here is the ORIGINAL data of the Sporthotel problem: 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%. Assume that everything is the same in the problem except for one thing: the first year projected outflow is not $1 million but instead is $1.1 million. Given this change,  The project’s NPV = _______ million

Answer 1

Total Cash Outflow after change = $1.1million + $2million + $2million = $5.1million

The value of the inflows,

Situation	Probability	Worth	Value(considering probability)
Franchise is granted	50% or 0.5	$8million	$4million (prob.*worth)
Franchise is denied	1-0.5 = 0.5	$2million	$1million (prob.*worth)
		TOTAL	$5million

NPV = inflows - outflows = $5million - $5.1million = ($100,000).

The NPV of the project is negative so the project should not be taken up.