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SK
SK, Chartered Accountant (CA)
Category: Finance
Satisfied Customers: 94
Experience:  4.5 Yrs Industry Experience, Chartered Accountant from India, Cleared CPA Exam & CFA Level 1 Exam
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Kanga Resorts is interested in developing a new facility in

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Kanga Resorts is interested in developing a new facility in Asia. The company estimates that the hotel would require an initial investment of $14 million. The company expects that the facility will produce positive cash flows of $2.6 million a year at the end of each of the next 10 years. The project's cost of capital is 12%.
a.     Calculate the expected net present value of the project.
b.     The company recognizes that the cash flows could, in fact, be much higher or lower than $2.6 million, depending on whether the host government imposes a large facility tax. One year from now, the company will know whether the tax will be imposed. There is a 40 percent chance that the tax will the imposed, in which case the yearly cash flows will be only $2 million. At the same time, there is a 60 percent chance that the tax will not be imposed, in which case the yearly cash flows will be $3 million.   The company is deciding whether to proceed with the facility today or to wait 1 year to find out whether the tax will be imposed. If it waits year, the initial investment will remain at $14 million. Assume that all cash flows are discounted at 12 percent. Using decision tree analysis, calculate the value of the real option to wait a year before deciding.
c.     Discuss 2-3 factors other than the value of the real option that the company should consider in making its decision?
Submitted: 5 years ago.
Category: Finance
Expert:  SK replied 5 years ago.

Hi

 

I would like to know what is your deadline on this.

 

Regards,

 

SK

Customer: replied 5 years ago.
2pm est
Expert:  SK replied 5 years ago.

HiCustomer/p>

 

Please click here for solution

 

Calculation of various figure is provide here

 

If you need any other calarification or explanation please let me know.

 

Regards

 

SK

 

If the solution was helpful, please accept it and leave a positve feedback.

SK, Chartered Accountant (CA)
Category: Finance
Satisfied Customers: 94
Experience: 4.5 Yrs Industry Experience, Chartered Accountant from India, Cleared CPA Exam & CFA Level 1 Exam
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