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A restaurant owner’s business is doing very well. The owner now wants to expand the business. The owner is considering either constructing a whole new building or rehabilitating the existing building

A restaurant owner’s business is doing very well. The owner now wants to expand the business. The owner is considering either constructing a whole new building or rehabilitating the existing building. The following is the payoff table the owner constructed:

States-of-Nature

Strong Market Payoff Weak Market Payoff

Alternative .8 .2 EMV

Build new restaurant $7,500,000 $4,000,000 $6,800,000

Rehab existing $5,500,000 $2,500,000 $4,900,000

What is the correct formula for calculating the payoff for building a new restaurant in a strong market?

=(.8 – .2) * $7,500,000

=(.8 * $4,000,000)

=.8 * $7,500,000

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