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Investment Timing Option: Decision - Tree Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would
Investment Timing Option: DecisionTree Analysis
Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $ million. Kim expects the hotel will produce positive cash flows of $ million a year at the end of each of the next years. The project's cost of capital is
a What is the project's net present value? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $ million should be entered as not Round your answer to two decimal places.
$ million
b Kim expects the cash flows to be $ million a year, but it recognizes that the cash flows could actually 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 chance that the tax will be imposed, in which case the yearly cash flows will be only $ million. At the same time, there is a chance that the tax will not be imposed, in which case the yearly cash flows will be $ million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $ million. Assume that all cash flows are discounted at Use decisiontree analysis to determine whether Kim should proceed with the project today or wait a yeat before deciding.
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