Buffalo Drumsticks Is Evaluating a Proposal to Open a Restaurant

Buffalo Drumsticks is evaluating a proposal to open a restaurant in Bermuda.The restaurant will cost $29 million to open.Expected cash flows are $8 million per year for the first five years.At the end of 5 years,the government of Bermuda will either revoke BD's permit and the restaurant will close,or renew the permit indefinitely.If the permit is revoked,the building and equipment can be sold for $10,000,000.If the permit is renewed,assume that the $8 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%.

A) $37.66 million
B) ($15.16 million)
C) $28.02 million
D) $18.86 million

Correct Answer:

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