Calhoun Resorts is interested in developing a new facility in Toronto. The company estimates that the hotel would require an initial investment of $10 million. The company expects that the facility will produce positive cash flows of $2,710,000 a year at the end of each of the next 5 years. The project's cost of capital is 11%.

a. Calculate the expected net present value of the project.

b. The company recognizes that the cash flows could be higher or lower than 2,710,000, depending on whether the host government imposes a facility tax. The company will know in one year whether the tax will be imposed. There is a 30 percent chance that the tax will the imposed, in which case the yearly cash flows will be only $2.5 million. At the same time, there is a 70 percent chance that the tax will not be imposed, in which case the yearly cash flows will be $3.2 million. The company is deciding whether to proceed with the facility today or to wait 1 year to find out whether the tax will be imposed. If it waits year, the initial investment will remain at $10 million and incoming cash flows will be delayed 1 year. Assume that all cash flows are discounted at 11 percent. Using decision tree analysis, calculate the value of the real option to wait a year before deciding.

c. Discuss 2-3 factors other than the value of the real option that the company should consider in making its decision.