I was already given the correct answer for Parts A-C. The equation I was given was = -(1.4+6)+ .5/.12*(1-1/1.12^15). I was wondering what the numbers correlate to in the problem though, specifically, where do these numbers come from in the text? .5/.12*(1-1/1.12^15)
I was already given the correct answer for Parts A-C. The equation I was given was = -(1.4+6)+ .5/.12*(1-1/1.12^15). I was wondering what the numbers correlate to in the problem though, specifically, where do these numbers come from in the text? .5/.12*(1-1/1.12^15)
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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I was already given the correct answer for Parts A-C. The equation I was given was = -(1.4+6)+ .5/.12*(1-1/1.12^15). I was wondering what the numbers correlate to in the problem though, specifically, where do these numbers come from in the text?
.5/.12*(1-1/1.12^15)
Transcribed Image Text:**Real Options Boisjoly Enterprises: Project Evaluation**
Boisjoly Enterprises is considering a vacant lot purchase priced at $1.4 million. If acquired, the plan involves investing an additional $6 million to construct a hotel. The cash flows from this development are contingent upon whether a tourism tax is enacted in the current legislative session.
- **Tax Scenario:**
- If the tax is imposed, the hotel anticipates annual cash flows of $500,000 for 15 years.
- **No Tax Scenario:**
- Without the tax, expected annual cash flows are $1,200,000 for 15 years.
- **Financial Context:**
- Project's Weighted Average Cost of Capital (WACC): 12%
- Initial assumption: No option to delay the project
**Questions:**
a. **NPV with Tax Imposition:**
- Calculate the Net Present Value (NPV) considering the tax effect.
b. **NPV without Tax Imposition:**
- Determine the NPV assuming no tax is imposed.
c. **Expected NPV with 45% Tax Probability:**
- With a 45% chance of tax imposition, calculate the expected NPV if the project starts immediately.
d. **Impact of Abandonment Option:**
- Evaluate the decision to proceed with the project considering the option to abandon:
- If abandoned after 1 year (with tax), sell the property for an expected $7 million (post-tax).
- Assess how abandonment possibility (cash flows discounted at 12%) influences the decision.
This analysis assists in determining the feasibility and strategic decisions regarding the hotel project by evaluating various financial scenarios and options.
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