Frump, Inc. has an opportunity to build a hotel in Moscow. It will
be quite expensive to do so, is very risky, and the expected NPV is -$100 million. Frump, however, realizes there is a growth option embedded in the investment: If the hotel is a success, it can expand operations into a chain of massage parlors and considering the cash flows from the hotel and the massage parlors combined, the expected NPV of the combined Hotel/Massage parlor project is $150 million. What is the value of the growth option embedded in the project? The cost of capital is 10% and the risk free rate is 6%. Frump's tax rate is 10%.
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