Nevada Enterprises is considering buying a vacant lot that sells for $1.2 million. If the...
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Nevada Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is purchased, the companys plan is to spend another $5 million today (t 0) to build a hotel on the property. The after-tax cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this years legislative session. If the tax is imposed, the hotel is expected to produce after-tax cash inflows of $600,000 at the end of each of the next 15 years. If the tax is not imposed, the hotel is expected to produce after-tax cash inflows of $1,200,000 at the end of each of the next 15 years. The project has a 12% WACC.
Assume at the outset that the company does not have the option to delay the project.
a. What is the projects expected NPV if the tax is imposed?
b. What is the projects expected NPV if the tax is not imposed?
c. Given that there is a 50% chance that the tax will be imposed, what is the projects expected NPV if management proceeds with it today?
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