Excel Online Structured Activity: Investment Timing Option: Option Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects that the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. While Kim expects the cash flows to be $3 million a year, it recognizes that the cash flows could, in fact, be much higher or lower, depending on whether the Korean government imposes a large hotel tax. 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 be only $2.2 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 be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait 1 year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. The data has been collectid in the Microsoft Excel Online file below. Open the spreadsheet and perform the rennrad analycie to anewer the ninetinne holow Next Investment Timing Option: Option Analysis deciding whether to proceed with the hotel today or to wait 1 year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet Use the Black-Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 6.54% and the risk-free rate is 5%. Enter your answer in millions. For example, an answer of $1.22 million should be entered as 1.22, not 1,220,000. Do not round intermediate calculations. Round your answer to two decimal places. million fx A B 1 Investment Timing Option: Option Analysis 3 No Timing Option: 4 Initial investment at t = 0 (in millions) 5 Annual expected cash flow (in millions) 6 Number of years cash flow expected 7 Project cost of capital $20.00 $3.00 20 13% 8 9 Timing Option: 10 Initial investment at t = 1 (in millions) 11 Number of years cash flow expected 12 Probability that tax will be imposed 13 Annual CF if tax will be imposed, Years 2 to 21 14 Probability that tax will not be imposed 15 Annual CF if tax will not be imposed, Years.2 to 21 16 Projected cost of capital 17 18 PV of CFs (in millions) at t = 1. if tax will be imposed $20.00 20 50% $2.20 50% $3.80 13% S15 45 = A Sheet1 + Calculation Mode: Automatic Workbook Statistics Type here to search O W Review View Help Tell me what you want to do Arial 10 V BB . be Currency B28 fx A B C $15.45 $26.69 $21.07 1 17 18 PV of CFs (in millions) at t = 1, if tax will be imposed 19 PV of CFs (in millions) at t = 1, if tax will not be imposed 20 PV of Expected CFs (in millions) at t = 1, with timing option 21 22 Value of Option Using Black-Scholes Model: 23 Number of years until expiration expires 24 Variance of project's expected rate of return, o? 25 Risk-free rate of retum, TAF 26 Strike price (in millions) of underlying investment at t = 0, X 27 Price (in millions) of underlying investment, P = 29 d, Nd. de + N(D2) - 33 Value of option (in millions) = 6.54% 5.00% $20.00 28 30 Formulas #NA #NA ANA #NA #NA HNA 31 32 24 ll! Sheet1 + Calculation Mode: Automatic Workbook Statistics Type here to search O
