Reference no: EM132376415

Fat Burger is considering setting up a shop in Champaign, IL. Their plan can be divided into 3 stages.

Stage 1: The project requires a test marketing expense of $200,000. This test market is expected to last 1 year and there is a 60% chance of success.

Stage 2: If the test market is a success, the firm has to decide whether to introduce the product to one region of the country at a cost of $2 million (at the start of the second year) and there is an 80% chance of success.

Stage 3: If the regional introduction succeeds, the firm has to decide whether to introduce the product countrywide at a cost of $5 million (at the start of the third year). If it does so, there are three equal possibilities: a. The product sells much better than expected and generates $4 million in after-tax cash flows for the next 5 years. b. The product sells as well as expected and generates $2 million in after-tax cash flows for the next 5 years. c. The product sells less well than expected and generates $500,000 in after-tax cash flows for the next 5 years. Assume a cost of capital of 10%.

Estimate the expected NPV of Fat Burger's plan.