5 points Save Answer Here is the ORIGINAL data of the Sporthotel problem: 1. Pro
ID: 2782661 • Letter: 5
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5 points Save Answer 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 builkding 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%. Suppose that everything is the same as in that problem except one thing: the worth of the hotel, should the city be awarded the franchise, is not $8 milion but some unknown smaller number. What must the new worth of the hotel when the franchise is granted be in order for the NPV of the Sporthotel project to be equal to exactly zero? a. The value of the hotel should the city be awarded the franchise $4 million b. The value of the hotel should the city be awarded the franchise $8 million c. The value of the hotel should the city be awarded the franchise-$7 millon Od. The value of the hotel should the city be awarded the franchise-$0 milion e. The value of the hotel should the city be awarded the franchise $5 million QUESTION 23 3 points Save Answer You write a call option on a stock for a premium of $6. The exercise price is $11. What is the option's proft or loss if just prior to expiration the stock price is $0? b.$11 Oc. $5 e. $6 QUESTION 24 3 points Save Answer Which of the following comes closest to the net present value(NPV) of a project whose initial investment is $5 and which produces two cash flows: the first at the end of year 2 of $3 and the second at the end of year 4 of $7? The required rate of return is 11%? a. $2.05 Oc. $1.84 d.$1.64 e $2.26Explanation / Answer
a) for npv to be exactly zero , initial investement=worth of hotel
as no required rate of return is given value of hotel should be less than greater to total initial investement = 5 million
hence if no required rate of return is given as in question answer = 5 million( option e)
b) as we have writtena call option we will have to deliver the stock at 11$ if the stock value goes more than dollar 11(exercise price)
as the stock price is $6 we do not have to deliver the stock at a loss hence our profit is the premium value which is 6$
c)npv= initial investment + pv of future cash flows
npv = -5(Outflow) + 3/(1+11%)^2years + 7(1+11%)^4years
=-5 + 3/(1.11)^2 + 7(1.11)^4
=-5+2.479+4.781 =2.26
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