Investment Timing Option: Decision-Tree Analysis Kim Hotels is interested in dev
ID: 2656511 • Letter: I
Question
Investment Timing Option: Decision-Tree Analysis
Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $19 million. Kim expects the hotel will produce positive cash flows of $2.85 million a year at the end of each of the next 20 years. The project's cost of capital is 12%.
What is the project's net present value? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
Explanation / Answer
Net Present Value = Present value of cash inflows - present value of cash outflows
Net Present Value = Annutiy * [ 1 - 1 / ( 1 + R)n] / R - Initial investment
Net present value = 2,850,000 * [ 1 - 1 / ( 1 + 0.12)20] / 0.12 - 19,000,000
Net present value = 2,850,000 * 7.469444 - 19,000,000
Net present value = 2,287,914.44 or 2.29 million
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.