Question

​(Real options and capital​ budgeting) McDoogals Restaurants has come up with a new​ fast-food casual restaurant combining some of the features of​ Chipotle, Panera, and Shake​ Shack, but it is not quite sure how the public will react to it. McDoogals feels that there is a 50dash50 chance that consumers will like it and a 50dash50 chance that they​ won't. McDoogals is considering building one of these new​ restaurants; the cash flows if it succeeds and if it fails are given​ here:

The required rate of return is 11 percent. What is the NPV of the project if it is successfully​ received? What is the NPV if it is unsuccessfully​ received? Now determine the expected NPV from taking on this project given the fact that it has a 50dash50 chance of success. If the project is well received by the​ public, McDoogals expects to build 20 more of these restaurants. The cash flows from these projects will be identical to the cash flows from the successful​ outcome, with the initial outlay occurring in year 1 rather than year 0 and followed by four annual cash flows of ​$420 comma 000 each. The​ one-year delay for the expansion restaurants is a result of the fact that it will take one year to gauge how the public responds to the new restaurant. If it is not well​ received, then the project will be abandoned after year 4. What is the NPV of the project assuming that 20 additional of these restaurants will be​ built?

50% chance of success                       50% chance of failure

Year     Cash Flow        Year     Cash Flow

   0       -$1,400,000       0       -$1,400,000

   1       $420,000            1       $100,000

   2       $420,000            2       $100,000

   3       $420,000            3       $100,000

   4       $420,000            4       $100,000

1. What is the NPV of the project if it is successfully​ received?

Answer 1

If Successful NPV of single Project is $ 1,400,000 - $ 1,680,000 = $ 280,000

Hence 20 Projects NPV will be = $ 280,000*20 = $5,600,000