Problem:
Tennessee Fried Chicken is evaluating a proposal to open a fast food restaurant in Westphalia. The restaurant will cost $14.5 million to open. Expected cash flows are $4 million per year for the first 5 years. At the end of 5 years, the government of Westphalia will either revoke TFC's permit and the restaurant will close, or renew the permit indefinitely. In that case, assume that the $4 million turns into a perpetuity. There is a 30% chance the permit will be revoked and a 70% chance it will be renewed.
Required:
Question: Compute the expected NPV of the project. Use a discount rate of 12%.
- $18.83 million
- ($ .08 million)
- $13.16 million
- $9.43 million
Note: Please provide full description.