High Roller Properties is considering building a new casino at an after-tax cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-5o chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.00 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. O a. $314 O b. $964 O C. $126 O d. $503 O e. $189
High Roller Properties is considering building a new casino at an after-tax cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-5o chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.00 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. O a. $314 O b. $964 O C. $126 O d. $503 O e. $189
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:High Roller Properties is considering building a new casino at an after-tax cost of $10.o million at t = 0. The after-tax cash flows the casino generates will depend on whether the
state imposes a new income tax, and there is a 50-5o chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass,
the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1
year from now, in which case the property could be sold to net $6.00 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round
intermediate calculations.
O a. $314
O b. $964
O C. $126
O d. $503
O e. $189
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