Real options: Nevada Enterprises is considering buying a vacant lot that sells f
ID: 2685246 • Letter: R
Question
Real options: Nevada Enterprises is considering buying a vacant lot that sells for $1.3 million. If the property is purchased, the company's plan is to spend another $5 million today (t = 0) to build a hotel on the property. The cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year's legislative session. If the tax is imposed, the hotel is expected to produce cash inflows of $500,000 at the end of each of the next 15 years. If the tax is not imposed, the hotel is expected to produce cash inflows of $1,300,000 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. Write out your answers for parts a, b, c and e completely. For example, 13 million should be entered as 13,000,000. ....... a. What is the project's expected NPV if the tax is imposed? Round your answer to two decimal places. If the answer is negative, use minus sign .......... B.What is the project's expected NPV if the tax is not imposed? Round your answer to two decimal places. If the answer is negative, use minus sign.Explanation / Answer
a. NPV if the tax is imposed= -6.5m+800000PVIFA(13%,15)= $-1330096.941 b. NPV if the tax is not imposed= -6.5m+13,000,000 PVIFA(13%,15)= $77510924.7 c. NPV= -1330096.941x.5+(77510924.7x.5)= $38090423.88
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