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 wil 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 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 6.87% and the risk-free rate is 8%. 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 Investment Timing Option: Option Analysis No Timing Option Initial investment at t- 0 (in millions) Annual expected cash flow (in millions) Number of years cash flow expected Project cost of capital $20.00 $3.00 20 13% Timing Option nitial investment at t- 1 (in millions) Number of years cash flow expected Probability that tax will be imposed Annual CF if tax will be imposed, Years 2 to 21 Probability that tax will not be imposed Annual CF if tax will not be imposed, Years 2 to 21 Projected cost of capital $20.00 20 50% $2.20 50% $3.80 13% PV of CFs (in millions) at t- 1, if tax will be imposed PV of CFs (in millions) at t- 1, if tax will not be imposed PV of Expected CFs (in millions) att- 1, with timing option $15.45 $26.69 $21.07 Value of Option Using Black-Scholes Model Number of years until expiration expires 6.87% 8.00% Risk-free rate of retum, rRF Strike price (in millions) of underlying investment att-0, X$20.00 Formulas #N/A #N/A #N/A #N/A #N/A #N/A Price (in millions) of underlying investment, P- 2 N(d2) Value of option (in millions)