 To determine the success or failure of any new startup venture, we need to compute the value of this given venture and the value of any option that can be embedded to this venture at its terminal life. For that purpose, let's see an example. On the screen, we see certain financial projections for a newly startup venture, which is named as the Alligator Alley. It is a restaurant that is intended to serve alligator meat. There are four years financial projections that starts from the sales, which are 300,000 from year one to year two. And then there is an increase of 600,000 unit three and 100,000 in year four. The cash flows from operations are negative for the first two years, whereas these are positive for the later years. And increase in working capital is also there from year one to year four. If we see the net cash flows from the year one to year four, we see that there is negative net cash flows during the earlier two years, whereas these cash flows are positive for the later years starting from year three. And then if we see the present value of the terminal value, and from this terminal value, we can calculate the present value of this restaurant project, and that is 582561. Now to get start this project, we need an initial cash flow, and that is the cost of the building, which is 700,000. And if we see that the present value of cash outflow is 700,000, whereas the present value of cash inflow is 582,000, so resulting present value is the negative present value, which is negative NPV of 1,1700,439 dollars. So there is a negative NPV associated this with this project, and the implications for this project is that these projections are based on the expectations, including there are 50% chances that the meet will become popular in the region, and so it will fetch more cash flows for the firm than the projected one. And equal chances are there that the meet will become less popular, so it will fetch less cash flows for the firm than the projected cash flows. This means that this restaurant would not be funded with further capital if there were no possibility of the expansion by the owner. So we can see that there are options that can be embedded in this project, and these options are of two types, like the first option is that the project can be abundant under bad conditions and whereas the project can be expanded under the good conditions. Now let's see how this will work. So we have to choose any of the options, let we choose the option of expansion. Now there is a strategy to cater the regions where the alligator meet is already popular, so the forecast of the quick expansion is subject to the success of the first restaurant in those areas. Then we see that after 4 years if the project goes successful, after 4 years 30 more restaurants can be opened. This means that we need first 3 years to run the first restaurant smoothly and successfully in order to get it run very successfully and also to get enough amount of information to place an accurate value for the further forecasting to open 30 new projects. So we see that the successful running of the first unit will allow in the 4th year to open and get open the avenues for getting new capital from the external world. But that will happen after the 4 years and then after the 4 years the firm will be able to open 30 new restaurants in the regions. Now let's see how we can value this project and the embedded options. We see that the net present value of the single restaurant is negative and that is 117,439. So there is no chance of funding for the possibility of the additional capital because for that purpose we need to be successful then only there will be the possibility of setting up 30 new units. This means that success will lead to the following observations because the total of setting up 30 new projects will be recurring the cost of 21 million dollars and the present value of cash flows at the 4 years will be 17.43 million dollars, 17.48 million dollars and if we convert this amount into the present value right now. The amount will become to 8.43 million dollars, we are assuming a discount rate of 20% at which we have discounted these future cash flows. This means now that this business is essentially a call option with the feature of exercise price of 21 million dollars and the underlying assets worth of 8.43 million dollars. So this option is apparently out of money because of the negative NPV earned by the first project. Now we have enough information to go for valuing the project through the help of black school model where we have the stock price of 8.43 million dollars and the access price is 21 million dollars, the term to maturity is 4 years. The riskiness of the return on the firm's assets is equal to 50% and the continuous rate of return compounded is equal to 3.5%. The value of this option will be determined using the black school formula which will be working in three steps. At first step we need to determine the value of D1 and D2 and at the second step we need to determine the value of D1 and D2 using the normal distribution function through the excel mode. Then when we have all the required information with us we can put these available information in the BS model and through this model we can determine the value of the call and that comes to 1.454 million dollars. This means that the value of the business including the cost of the first restaurant is basically equal to 1.337 million dollars and that has been reduced from 1.45 million dollars due to the result that we have negative NPV on our first project or first restaurant. Now we can draw a conclusion from this example that the first unit is earning a negative NPV due to this the investors will not invest in this loss earning unit and as a result there will be no capital raising in the future. But if the operation of the first project goes successful then there will be the chance of expansion and that chance of expansion will be offered to the investors. So the investors will be happily willing to give additional money to the firm's owners to open 30 new restaurants in the regions. So we can say that virtually every business has both options to abundant and options to expand but only an option say the option of expansion can be appropriate. That is better to go for the option of expansion but ignoring any of the two options may lead towards an undervaluation of the given project.