Use decision-tree analysis

Assignment Help Financial Management

Reference no: EM131316005

Real Options

Baatar Hotels is interested in developing a new hotel in Mongolia. The company estimates that the hotel would require an initial investment of $20M. Baatar expects the hotel will produce positive cash flows of $5M a year at the end of each year for the next 20 years. The project's cost of capital is 12%.

a. What is the NPV?

b. Baatar expects the cash flows to be $4M per year, but it recognizes that the cash flows could actually be much higher or much lower, depending on whether the Mongolian government imposes a large hotel tax. One year from now, Baatar 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 only be $2.2M. 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 $7.8M. Baatar is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Baatar waits a year, the investment will remain at $20M. Assume that all cash flows are discounted at 12%.

USE decision-tree analysis to determine whether to proceed today or to wait one year.

Reference no: EM131316005

Questions Cloud

Explain the target market : Create an 8- to 10-slide Microsoft PowerPoint presentation with notes including the following: Develop a Summary slide. Explain the target market (be specific and address all four segmentation variables - demographic, geographic, psychographic and ..

Discuss about the case study given below : The project will contain a clearly stated research question (what the researcher wants to investigate), the importance and relevance of the topic, a complete literature review, a methods section explaining the population under investigation, the s..

What is the maximum likely error in the point estimate : Determine the point estimate, then construct the 95% confidence interval for = the population proportion in the "single or other" category. What is the maximum likely error in the point estimate of the population proportion?

Discuss different types of terrorist threats : Discuss different types of terrorist threats that the United States might expect to encounter in the future.Discuss some of the potential implications of future terrorist attacks where the United States might need to increase counterterrorism effor..

Use decision-tree analysis : Baatar Hotels is interested in developing a new hotel in Mongolia. The company estimates that the hotel would require an initial investment of $20M. Baatar expects the hotel will produce positive cash flows of $5M a year at the end of each year for t..

How to align the organizational structure : How to align the organizational structure with the work processes," Select an organization of your choice and examine the structure. Then, briefly describe the type of structure the organization has and explain how it is effective in accomplishing ..

The heap consists of exactly the nine cars on three trains : Suppose the heap consists of exactly the nine cars on three trains shown in given figure.- Object o in car 11 has references from cars 12, 23, and 32. When we garbage collect car 11, where might o wind up.

Discuss about the case-centervale and counterterrorism : Perform research on women suicide bombers in the United States. Evaluate how likely Centervale is to experience a female suicide bomber. Discuss where female suicide bombers are common and what other roles females from nations that support terrori..

What function is computed by the above device : Using suitable values for valid logic levels and noise margins, what logic function does the device with the above transfer characteristic compute? Assume the convention of positive logic.

User Account

All Pages