Investment Timing Option Decision Tree 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 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 12 What is the project's net present value Do not round intermediate calculations Enter your answer in millions For example, an answer of $1 23 million should be entered as 1 23, not 1,230,000 Round your answer to two decimal places $ million Kim expects the cash flows to be $3 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 50 chance that the tax will be imposed, in which case the yearly cash flows will be only $2 1 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 9 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 $20 million Assume that all cash flows are discounted at 12 Use decision tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding Select It makes sense to proceed with the project today It makes sense to wait a year before deciding Item 2

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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 require an

Investment Timing Option: Decision-Tree 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 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 12%.

What is the project's net present value? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places.

$ million

Kim expects the cash flows to be $3 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 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.1 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 $3.9 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 $20 million. Assume that all cash flows are discounted at 12%. Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding.

-Select-It makes sense to proceed with the project today.It makes sense to wait a year before deciding.Item 2