You are considering to open a coffee shop. You would need to buy a property refurbish it. The initial investment would be 4,5 million e. Once you have opened you will observe the demand. If the demand is high you will receive net cash flows 0.5 million a year forever. if demand is low then you will get 0.25 million forever. The probability of high demand is 60% and for low 40%. The discount rate is 10%.
a. What is the NPV of this investment opportunity?
B. now consider that after you observe low demand you have chosen to do nothing and keep getting 0.25 million forever every year or you could redecorate property for 0.5 million as rent it out as an office space for 0.4 million per year forever (starting at year 2). What choice will you make?
c. What is the NPV of the project now?