Question

Here is the ORIGINAL data of the Sporthotel problom: 1. Projected outflows First year (Purchase Right, Land, and Permits) Second Year (Construct building shel Third Year: (Finish interior and furnishings) TOTAL $1,000,000 $2,000,000 $5,000,000 2. Projected inflows If the franchise is granted hotelwill be worth If the franchise is denied hotelwill be worth $8,000,000 when it opened $2,000,000 when it opened. The probability of the city being awarded the franchise is 50%. the hotel, should the city be awarded the franchise, is not $8 million but some order for the NPV of the Sporthotel přoject to be equal to exactly Suppose that everything is the same as in that problem except one thing the worth of unknown smaller number. What must the new worth of the hotel when the franchise is granted be in f zero? O a The value of the hotel should the city be awarded the franchise $7 milion b. The value of the hotel should the city be awarded the franchise So million c The value of the hotel should the city be awarded the franchise $5 millon d The value of the hotel should the city be awarded the franchise $8 million e. The value of the hotel should the city be awarded the franchise-$4 million

Answer 1

Answer is d i.e 6 million. Calculation is given below:

Particulars	Year			NPV
	1	2	3
Purchase Right, land and permits	-1000000			-1000000
Construct building shell		-2000000		-2000000
Finish interior			-1000000	-1000000
Hotel worth			4000000	4000000
	-1000000	-2000000	3000000	0
Calculation
	granted	not granted	Total	Probabilty	Hotel worth
	6000000	2000000	8000000	50%	4000000