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d. What disadvantages might arise from delay ing $1.4 million. If the property is purchased, the company's plan is to spend another $6 million oday (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 th tax is imposed, the hotel is expected to produce cash flows of $500,000 at the end of each o the next 15 years. If the tax is not imposed, the hotel is expected to produce cash flows of $1,200,000 at the end of each of the next 15 years. The project has a 12% WACC. Assume the outset that the company does not have the option to delay the project 13-7 REAL OPTIONS Boisjoly Enterprises is considering buying a vacant lot that sells for at What is the project's expected NPV if the tax is imposed? b. What is the project's expected NPV if the tax is not imposed? c. Given that there is a 45% chance that the tax will be imposed, what is the project's d. Although the company does not have an option to delay construction, it does have the expected NPV if management proceeds with it today? option to abandon the project 1 year from now if the tax is imposed. If it abandons the ill sell the complete property 1 year from now at an expected price of ro $7 milion after taxes. Once the project is abandoned, the company will no longer receive any cash flows. Assuming that all cash flows are discounted at 12%, will th existence o the project today? Explain. nment option affect the company's decision to proceed with e. Finally assume th at there is no option to abandon or delay the project, but that the f this abando company has an option to purchase an adjacent property in 1 year at a price o 7 million (outflow at t1). If th value of developing this property (as of t 1) will be only $500,000 (so it doesn't ma sense to purchase the property for $1.7 million). However, if the tax is not imposed the expected net present value of the future opportunities from developing the prop ty will be $5 million (as of t 1). Thus, under this scenario, it makes sense to purchase the property for $1.7 million (at t 1). Assume that these cash flows are discounted 12% and the probability that the tax will be imposed is still 45%. what is the most the company would pay today (t 0) for the $1.7 million purchase option (at t 1) fo he adjacent property e tourism tax is imposed, the expected net present ake