3 20 points Investment Timing Option: Decision-Tree Analysis $ $ Kim Hotels is interested in developing a new hotel in Seoul. the need --The company estimates that the hotel would require an initial investment listed to the right. --Kim expects the hotel will produce positive cash flows of the amount listed to the right --The number of years the project will produce postive cash flows is listed to the right. --The project's cost of capital is listed to the right Initial investment positive cash flow per year number of years cost of capital (15.00) million 2.50 million 20 11% a. What is the project's net present value? (5 points) b. Kim expects that the cash flows are the initial amount referred to above. It recognizes, however, that the cash flows could be much higher or lower, depending on whether the Korean government imposes . a large hotel tak --One year from now, Kim will know whether the tax will be imposed --There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will decrease to the amount listed on the right. $ if tax is imposed, positive cash flow per year if tax is not imposed, positive cash flow per year 1.50 million $ $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ $ 2.50 $ 1.50 $ 3.50 $ $ $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ 2.50 $ 1.50 $ 3.50 $2.50 $ 1.50 $ 3.50 $2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ 2.50 $ 1.50 $ 3.50 $ $2.50 $ 1.50 $ 3.50 $ 2.50 $1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ $ 3.50 million --At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will increase to the amount listed on the right --Kim needs to decide whether to proceed with the hotel project today or to wait a year to find out whter the tax will be imposed. --if Kim waits a year, the initial investment and cost of capital will remain the same. - Assume that all cash flows are discounted at the cost of capital. --Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding. -- Use the decision trees constructed below to analyze the wait and no wait scenarios. --Calculate the NPV for each wait or no-wait scenario. Remember to take into account the chance of each NPV happening- (10 points) --Should Kim wait to invest? Why or why not? (5 points) Please show work and answer questions completely to receive full credit. Year o 1a NPV of Project million 1b Future Cash Flows Year 2 2 Now: Year 0 Probability Year1 Year 20 NPV of this scenario No Taxes 0.5 3.8 3.8 3.8 million $20) Taxes 2.2 2.2 2.2 million 0.5 1 Expected value of NPV Future Cash Flows Now: Year o Probability Year1 Year 2 Year 21 NPV of this scenario No Taxes 0.5 -20 3.8 3.8 Walt Taxes O 0 0 0 0.5 1 Expected value of NPV Should Kim wait to invest? Why or Why not? 3 20 points Investment Timing Option: Decision-Tree Analysis $ $ Kim Hotels is interested in developing a new hotel in Seoul. the need --The company estimates that the hotel would require an initial investment listed to the right. --Kim expects the hotel will produce positive cash flows of the amount listed to the right --The number of years the project will produce postive cash flows is listed to the right. --The project's cost of capital is listed to the right Initial investment positive cash flow per year number of years cost of capital (15.00) million 2.50 million 20 11% a. What is the project's net present value? (5 points) b. Kim expects that the cash flows are the initial amount referred to above. It recognizes, however, that the cash flows could be much higher or lower, depending on whether the Korean government imposes . a large hotel tak --One year from now, Kim will know whether the tax will be imposed --There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will decrease to the amount listed on the right. $ if tax is imposed, positive cash flow per year if tax is not imposed, positive cash flow per year 1.50 million $ $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ $ 2.50 $ 1.50 $ 3.50 $ $ $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ 2.50 $ 1.50 $ 3.50 $2.50 $ 1.50 $ 3.50 $2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ 2.50 $ 1.50 $ 3.50 $ $2.50 $ 1.50 $ 3.50 $ 2.50 $1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ 2.50 $ 1.50 $ 3.50 $ $ $ 3.50 million --At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will increase to the amount listed on the right --Kim needs to decide whether to proceed with the hotel project today or to wait a year to find out whter the tax will be imposed. --if Kim waits a year, the initial investment and cost of capital will remain the same. - Assume that all cash flows are discounted at the cost of capital. --Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding. -- Use the decision trees constructed below to analyze the wait and no wait scenarios. --Calculate the NPV for each wait or no-wait scenario. Remember to take into account the chance of each NPV happening- (10 points) --Should Kim wait to invest? Why or why not? (5 points) Please show work and answer questions completely to receive full credit. Year o 1a NPV of Project million 1b Future Cash Flows Year 2 2 Now: Year 0 Probability Year1 Year 20 NPV of this scenario No Taxes 0.5 3.8 3.8 3.8 million $20) Taxes 2.2 2.2 2.2 million 0.5 1 Expected value of NPV Future Cash Flows Now: Year o Probability Year1 Year 2 Year 21 NPV of this scenario No Taxes 0.5 -20 3.8 3.8 Walt Taxes O 0 0 0 0.5 1 Expected value of NPV Should Kim wait to invest? Why or Why not