Reference no: EM132410892

You are con ring opening two Theaters. One theaters will be opened in Boston and the other on the San Francisco. You could open both at the same time or open one and after a year open the other if the first did as good as expected or better. The hurdle return is 15% and the risk free rate is 5%.

The Boston Theater has expected cash flow of $55,000 in year 1 and will grow at 8% per year thereafter and can be 35% higher. The initial cost is the same whether open immediately or in a year and is $800,000. The San Francisco  shop has expected cash flow of $78,000 in first year and at 9% per year thereafter and can be 25% higher. The initial cost is the same whether open immediately or in a year and is $1,100,000. Hint: the cash flows are constant growth perpetuity, like common stock.

1. If Boston is opened in year 1, how much is the pv₁? 

2. If Boston is opened immediately, how much is the pv₀? 

3. If Boston is opened immediately how much is its NPV? 

4. If San Francisco is opened in year 1, how much is the pv₁? 

5. If San Francisco is opened immediately, how much is the pv₀?

6. If San Francisco is opened immediately how much is its NPV?

7. How much is the NPV of opened simultaneously? 

8. How much is the call option if the Boston shop were opened in a year? How much is the call option if the San Francisco  shop were opened in a year?

9. How much is the NPV of opening the Boston  shop first and the San Francisco  shop a year later based on cash flows of Boston shop?

10. How much is the NPV of opening the San Francisco  shop first and the Boston  shop a year later based on cash flows of San Francisco  shop?