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b.
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 $2.2 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
$3.8 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 $20 million. Assume that all cash flows are discounted at
13%. Use decision-tree analysis to determine whether Kim should proceed with the
project today or wait a year before deciding.
Answer:
Cost of Project :$ 20 Milion
Cash Flow: $ 3 Milion
Life Project: 20 Years
Project Of Capital: 13 % = (0.13)
PV
3/(1+0.13)1=3/(1,330)
2,655
3/(1+0.13) =3/(1,277)
2,349
3/(1+0.13)3 =3/(1,433)
2,349
3/(1+0.13) = 3/(1,630)
2,079
3/(1+0.13)5 = 3/(1,842)
1,840
3/(1+0.13)6 = 3/(2,082)
1,628
3/(1+0.13) =3/(2,353)
1,441
3/(1+0.13) =3/(2,658)
1,275
3/(1+0.13) =3/(3,004)
1,128
10
10
3/(1+0.13) =3/(3,395)
0,099
11
3/(1+0.13)11=3/(3,836)
0,884
12
12
3/(1+0.13) =3/(4,335)
0,782
13
3/(1+0.13)13=3/(4,898)
0,692
14
3/(1+0.13)14=3/(5,535)
0,542
15
15
3/(1+0.13) =3/(6,254)
0,480
16
3/(1+0.13)16=3/(7,067)
0,424
17
17
3/(1+0.13) =3/(7,098)
0,376
18
3/(1+0.13)18=3/(9,024)
0,332
19
19
3/(1+0.13) =3/(10,197)
0,294
20
3/(1+0.13)20=3/(11,523)
0,260
Total
21,074
NPV
NPV
-20
-20
2,2/(1,13)1
1.947
3,8/(1,13)1
3.363
2,2/(1,13)
1.723
3,8/(1,13)
2.976
2,2/(1,13)
3,8/(1,13)
2.634
2,2/(1,13)
3,8/(1,13)
2.331
2,2/(1,13)
3,8/(1,13)
2.062
2,2/(1,13)
3,8/(1,13)
1.825
2,2/(1,13)
3,8/(1,13)
1.615
2,2/(1,13)
3,8/(1,13)
1.429
2,2/(1,13)
3,8/(1,13)
1.265
2,2/(1,13)
10
3,8/(1,13)
10
1.119
2,2/(1,13)
11
3,8/(1,13)
11
0.991
2,2/(1,13)
12
3,8/(1,13)
12
0.877
4
5
6
7
8
9
10
11
12
13
1.525
1.349
1.194
1.057
0.935
0.828
0.732
0.648
0.574
0.449
14
2,2/(1,13)13
15
2,2/(1,13)
14
2,2/(1,13)
15
2,2/(1,13)
16
2,2/(1,13)
17
2,2/(1,13)
18
2,2/(1,13)
19
2,2/(1,13)
20
16
17
18
19
20
21
Total
0.397
3,8/(1,13)13
0.776
0.352
3,8/(1,13)
14
0.687
3,8/(1,13)
15
0.608
3,8/(1,13)
16
0.538
3,8/(1,13)
17
0.476
3,8/(1,13)
18
0.421
3,8/(1,13)
19
0.373
3,8/(1,13)
20
0.311
0.275
0.244
0.216
0.191
0.397
15.45
Total
0.330
26.694