Tennessee Fried Chicken is evaluating a proposal to open a fast food restaurant

Question

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.  Compute the expected NPV of the project.  Use a discount rate of 12%.

Explanation / Answer

$13.16 million

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