Use the Following Information to Answer the Following Question(s)

question 3

Multiple Choice

Use the following information to answer the following question(s) .
Enrico,the owner of a pizza parlor near a large university campus,is considering opening a shop specializing in quick,inexpensive take-out meals that are low in fat and calories.He will use a vacant space adjacent to the pizza parlor.Assume that the project requires an initial cash outlay of $100,000.Finance students from the university have taken on the project as a course assignment.They believe that there is a 50% chance that the project will have modest success and return $11,000 per year for the foreseeable future (a perpetuity) .On the other hand,there is a 50% chance that the project will be highly successful and produce returns of $20,000 per year in perpetuity.If the restaurant is modestly successful,Enrico will keep it open,but not expand.If it is well received,he will immediately open 2 more shops at sites close to the sprawling campus.The additional shops would have approximately the same cash flow as the first.Cash flows will be discounted at 10%.
-What is the expected NPV of the project with the option to expand if the probability of modest success is revised to 70% and great success to 30%?

• A)$310,000
• B)$155,000 (no change)
• C)$213,000
• D)$97,000