Li'l Lucy's Fried Chicken Would Like to Invest $2 Million

Multiple Choice

Li'l Lucy's Fried Chicken would like to invest $2 million to buy land and build a a restaurant in an area that has been rezoned from agricultural to residential. The company expects a 9% return. The company believes there is a 15% probability that the neighbouring land will be fully developed into family homes resulting in income before depreciation of $800,000 a year. It also believes in a 60% chance that the neighbouring land will be gradually developed resulting in Year 1 income of $150,000, Year 2 income of $200,000, Years 3, 4 and 5 income of $500,000 and Years 6 and 7 income of $800,000. There exists a 25% chance that there will be no development resulting in an income of $150,000 a year from an alternative use of the land. Based on ENPV, should Li'l Lucy's Fried Chicken build the restaurant?

A) Yes, ENPV equals $164,207
B) Yes, ENPV equals $250,654
C) Yes, ENPV equals $452,170
D) No, ENPV equals ($5)
E) No, ENPV equals ($483,899)