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(Solved): You may attempt this question 2 more times for credit. Consider the Sport Hotel example that was in ...
You may attempt this question 2 more times for credit. Consider the Sport Hotel example that was introduced and solved in the lesson, the class notes, and in the text chapter on real options. Now consider this one change to that original problem: if the franchise is accepted the value of the hotel is not million but instead \$8.50. Everything else, all revenues and expenses, is the same as shown in the original example. Incorporating the real option, what probability of the franchise being granted would create a zero NPV for the investment? Place your answer in percentage form with at least 2 decimal places. For example, and answer of fifteen point four three percent would be entered 15.43 .
Expert Answer
To find the probability of the franchise being granted that would create a zero NPV for the investment, we need to solve for the threshold probability that would make the expected present value of the project equal to the initial investment cost of $7 million.Using the same approach as in the Sport Hotel example, we can calculate the expected present value (EPV) of the project as follows:EPV = (probability of franchise being granted) x (present value of franchise option) + (1 - probability of franchise being granted) x (present value of no franchise option)The present value of the franchise option can be calculated as follows:PV of franchise option = $8.50 million - $7 million = $1.50 million