A Concert Promoter Assesses That the Probability of a Concert

question 48

Multiple Choice

A concert promoter assesses that the probability of a concert being a success is 0.4. The initial cash cost to take out an option to organise the concert will be £50,000. A success will create a present value of all cash flows of £250,000 and a flop will lose £100,000. The promoter can make a final decision at a later date before making any further payments. What is the expected NPV, using an options approach?

• A) £50,000
• B) £14,000
• C) £10,000
• D) - £10,000

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Definitions:

Diversification Analysis

A technique that helps a firm search for growth opportunities from among current and new markets as well as current and new products.

Business Portfolio Analysis

A strategic evaluation that examines a company’s range of products or services to determine their individual strengths, weaknesses, and contributions to overall business goals.

Strategic Business Units

Subsidiary divisions within a larger company, each focusing on a specific business area, with its own strategy and objectives.

Competitive Advantage

The attributes or abilities of a firm that enable it to outperform its competitors.