Frederick's Fish & Chips Is Evaluating a Proposal to Open

question 14

Multiple Choice

Frederick's Fish & Chips is evaluating a proposal to open a restaurant in Cairns.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 Cains council 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

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Definitions:

Mining Property

Refers to land or rights to land granted for the exploration and extraction of minerals, oils, or other natural resources.

Ore

A naturally occurring solid material from which a metal or valuable mineral can be profitably extracted.

Depletion Expense

A charge against profits representing the reduction in value of a natural resource as it is extracted or consumed.

Mining Property

Land or rights to land that are held for the purpose of extracting minerals, oil, or gas.