Reference no: EM132383929

Big Sky Timber is a project to cut forest, process into timber and export to China. The initial investment to buy the forest and machineries is $2 million. All the timber can be cut and processed in one year to net expected cash inflows of $3 million. The cost of capital is 15%. 

1. Should the project be undertaken?
2. Assume the project faces the risk of China imposing tariffs if the trade negotiations are not settled with good compromise. If there is no trade war, cash flow of the project will be $4 million. If the trade war escalates, cash flow will be $2 million. The chance of trade was escalating is 50:50. The firm can wait for one year and see how the trade negotiations end and make the final commitment. Should the project be delayed by one year?
3. If there is commitment fee to delay the project, what is the maximum the firm should pay for the exclusive right to delay the project?