Investment timing option-decision-tree analysis

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Reference no: EM131347731

Investment Timing Option: Decision-Tree Analysis Hart Lumber is considering the purchase of a paper company which would require an initial investment of $330 million. Hart estimates that the paper company would provide net cash flows of $39.6 million at the end of each of the next 20 years. The cost of capital for the paper company is 10%. Should Hart purchase the paper company? Hart's best guess is that cash flows will be $39.6 million a year, but it realizes that the cash flows are as likely to be $33 million a year as $46.2 million. One year from now, it will find out whether the cash flows will be $33 million or $46.2 million. In addition, Hart could sell the paper company at Year 3 for $313.5 million. Given this additional information, does using decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 10%.

Reference no: EM131347731

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