The Alpha Multiple Fund $($AMF$),$ specialising in financing sustainable initiatives, is considering investing $$200$ million in Clean Energy Project $($CEP Co$.)$ as a fixed$-$rate debt. All surplus cash is invested in money market funds that yield $6\%$ annually without exposing the firm to any downside risk. AMF has historically generated a pre$-$tax average annual return on investment of $15\%$ on similar long$-$term investments and is expected to continue to do so in the future. However, the investment opportunities may quickly shrink; hence, the fund must evaluate other project proposals, and all projects available today are mutually exclusive. The tax rate is $35\%.$ The fund's investment policy is only to commit funds for long$-$term projects with a lifespan of $3$ years or more. AMF will charge CEP Co$,$ a one$-$time investment processing fee of a total $3\%($after$-$tax$)$ of the initial investment; this expense will be paid by CEP Co$.$ annually $($starting at t$=1)$ in equal instalments over the project's life.

CEP Co$.$ is considering using real$-$options analysis to assess the value of the investment timing option, which is $1$ year from today. The probabilities in each scenario and the projected after$-$ tax annual cash flows over the three years are as follows: Scenario $1-25\%$ probability $=>$ $$120$ million per year, Scenario $2-50\%$ probability $=>$ $$100$ million per year, and Scenario $3-25\%$ probability $=>$ $$45$ million per year. The initial investment is $$200$ million. The company is in a $35\%$ tax bracket. Due to subsidies for environment$-$friendly projects, the hurdle rate is kept at $16\%$ per annum.

To mitigate interest rate uncertainty, the asset manager at AMF negotiates a fixed interest rate in advance with the company. The annual after$-$tax cost of debt for CEP Co$.$ is estimated at $24\%$ for the three$-$year investment period if the investment is undertaken. AMF's investors require a yearly rate of $12\%$ on their investment.

The asset manager must evaluate whether the hedge fund should defer its current investment plans and wait.

Required:

a$.$ Identify all sources of incremental cash flows that AMF will consider for projecting cash flows in this case?

b$.$ Index all the relevant cash flows from this investment decision for AMF on the timeline. Use

a decision tree for illustration.

c$.$ Apply the NPV approach to decide whether AMF should undertake this investment decision