iday (t=0) to build a hotel on the property. The after-tax cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year's legislative: assion. If the tax is imposed, the hotel is expected to produce after-tax cash flows of $700,000 at the end of each of the next is years. If the tax is not imposed, the hotel is xpected to produce after-tax cash flows of $1,100,000 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 ne option to delay the project. a. What is the project's expected NPV if the tax is imposed? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest cent. 5 b. What is the project's expected Npy if the tax is not imposed? Negative value, If any, should be indicated by a minus sign. Do not round intermediate calculations. Aound your answer to the nearest cent. \$ c. Given that there is a 450 chance that the tax wal be imposed, what is the project's expected Noy if management proceeds with it today? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your anwer to the nearest cent. 3 d. Although the company does not have an option to delay construction, it does hove the option to abandon the project 1 year from now if the tax is imposed. If it abandons the project, it will sell the complete property 1 year from now at an expected price of $7 million after taxes. Once the project is abandened, the company will no langer. receive any cash fows. Assuming that all cash flows are discounted at 12%, will the existence of this abandonment option affect the company's decision to proceed with the project today? Negative value, if any, should be indicated by a minis sign. Do not round intermediate calculations. Pound your answer to the nearest cent. 5 e. Finaly, assume that there is no option to abandon or delay the project, but that the company has an option to purchase an adjacent property in 1 year for an after tax investment of $1.5 million (outfew at t=1 ). If the tourism tax is imposed, the expected NPV of developing this property (as of t in will be only s300,000 (w0 it doesn' make sense to purchase the property for 11.5 mition after taxes), Hewever, if the tax is not imposed, the expected Nov of the future ipportunities from deveioping the property will be 55 milion (as of t=1 ). Thus, under this scenario, to makes sense to purchase the property for $1.5 milion after takes (at t=1. Assume that these cash flows are discounted at 12 (as 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 $1.5 million purctase option (at t=1 ) for the adjacent property? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your arswer to the nearest cent. $
