What is the project net present value

Assignment Help Accounting Basics
Reference no: EM133112451

Question - Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $21 million. Kim expects the hotel will produce positive cash flows of $3.36 million a year at the end of each of the next 20 years. The project's cost of capital is 12%.

Required -

a) What is the project's net present value? A negative value should be entered with a negative sign.

b) Kim expects the cash flows to be $3.36 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim 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 be only $2.31 million. 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 $4.41 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $21 million. Assume that all cash flows are discounted at 12%. Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding.

Reference no: EM133112451

Questions Cloud

What amount of tuition revenue should the college recognize : Assuming the college prepares adjustments on January 31, what amount of tuition revenue should the college recognize for the month of January
Price of king richard radio stock : King Richard Radio's stock is expected to grow at a 10 percent rate for the next 3 years and then to level off at a constant growth rate of 3 percent per year t
Calculate the stock price after the dividends : The first dividend will be $5 (i.e. D3=$5). After that, dividends will increase by a fixed rate of 3.5% per year indefinitely. The required return on the stock
Determine katy retained earnings as of january : During the year, Katy reported net income of $28,666 million and paid a dividend of $2,690 million. Determine Katy's retained earnings as of January 31, 2017
What is the project net present value : The company estimates that the hotel would require an initial investment of $21 million. What is the project net present value
Company operational and organizational strategies-process : The purpose of this assignment is to assess the effectiveness of a company's operational and organizational strategies and processes.
Compute depreciation expense : Compute depreciation expense under each of the following methods. Skysong is on a calendar-year basis ending December 3
Calculate coby fuel tax credit entitlement : During the 2013 income year Coby's cranes, earthmovers and other vehicles over 4.5 tonnes used 18,339 litres of diesel. Calculate Coby Fuel Tax Credit
Attitudes about diversity : What prior experiences have affected your current viewpoints or attitudes about diversity? What does "diversity" mean to you?

Reviews

Write a Review

Accounting Basics Questions & Answers

  How much control does fed have over this longer real rate

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate?

  Coures:- fundamental accounting principles

Coures:- Fundamental Accounting Principles: - Explain the goals and uses of special journals.

  Accounting problems

Accounting problems,  Draw a detailed timeline incorporating the dividends, calculate    the exact Payback Period  b)   the discounted Payback Period. the IRR,  the NPV, the Profitability Index.

  Write a report on internal controls

Write a report on Internal Controls

  Prepare the bank reconciliation for company

Prepare the bank reconciliation for company.

  Cost-benefit analysis

Create a cost-benefit analysis to evaluate the project

  Theory of interest

Theory of Interest: NPV, IRR, Nominal and Real, Amortization, Sinking Fund, TWRR, DWRR

  Liquidity and profitability

Distinguish between liquidity and profitability.

  What is the expected risk premium on the portfolio

Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments.

  Simple interest and compound interest

Simple Interest, Compound interest, discount rate, force of interest, AV, PV

  Capm and venture capital

CAPM and Venture Capital

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd