Please answer letter B and C only:

Investment Timing Option: Decision$-$Tree Analysis: Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $$300$ million. Wansley estimates that the paper company would provide net cash flows of $$40$ million at the end of each of the next $20$ years. The cost of capital for the paper company is $13\%.$

Answers:

a$.$ Should Wansley purchase the paper company?

Given details for this are here under:

Initial Investment $($I$)=$ $$300$ Million

Net Annual Cash Flow $($A$)=$ $ $40$ Million for $20$ Years

Cost of Capital $($Kc$)=13\%$

Therefore, Present Value of Future Cash Flows$=$ Present Value Interest Factor of Annuity $($PVIFA$)$

Computing net present value:

year Cashflows PVF@$13\%$ PV of cash flows

$0-3001-300$

$1-20407\mathrm{.}0248280\mathrm{.}99$

NPV $-19\mathrm{.}01$

$*$Present value annuity factor at $13\%$ of $$1$ for $20$ years is $7\mathrm{.}0248$

$=$ PVIFA A$($I$,$ Kc$)$

$=$ PVIFA $40(13\%,20)$

$=40*7\mathrm{.}0248($This $7\mathrm{.}0248$ is Interest Factor of Annuity. It can be said that sum of Present Value of $13\%$ i$.$e$.1\mathrm{.}13$ for $20$ Years$).$

$=$$$280\mathrm{.}99$ Mllion

Initial Investment$=$ $ $300$ Million

Therefore, Net Present Value$=-$$$19$ million.

Therefore, the purchase of a paper company is not advisable.

b$.$ Wansley realizes that the cash flows in Years $1$ to $20$ might be $$30$ million per year or $$50$ million per year, with a $50\%$ probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company $2$ years after purchase $($at Year $2$ in this case$)$ for $$280$ million if it no longer wants to own it$.$ Given this additional information, does decision$-$tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at $13\%.$

c$.$ Wansley can wait for $1$ year and find out whether the cash flows will be $$30$ million per year or $$50$ million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company $2$ years after purchase. Given this additional information, does decision$-$tree analysis indicate that it makes sense to purchase the paper company? If so$,$ when? Again, assume that all cash flows are discounted at $13\%.$