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SK, Chartered Accountant (CA)
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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

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?

Hi

Regards,

SK

Customer: replied 8 years ago.
2pm est

HiCustomer/p>

Calculation of various figure is provide here

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

Regards

SK

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