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Utah Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is purchased, the company's plan is to spend another $5m today to build a hotel on the property. The after-tax cash flows from the hotel will depend critically upon whether the country imposes a tourism tax in this year's budget. If the tax is imposed, the hotel is expected to produce after-tax inflows of $600 000 at the end of each of the next 15 years. If the tax is not imposed, the hotel is expected to produce after-tax cash inflows of $1 200 000 at the end of each of the next 15 years. The tourism sector has been lobbying vigorously against the tax, and projections are that there is a 70% probability that it will not be imposed.
The project has a 12% cost of capital.
Question 1: What is the projects expected NPV?
Question 2: Calculating the total initial investment
Question 3: Calculate the present value of cash inflow with taxes.
Question 4: Calculate the present value of cash inflow without taxes.
Question 5: Calculate the NPV of the project.
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