Excel Online Structured Activity: Investment Timing Option: Decision-Tree Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $18 million. Kim expects the hotel will produce positive cash flows of $2.7 million a year at the end of each of the next 20 years. The project's cost of capital is 12%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. X Open spreadsheet a. What is the project's net present value? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places. $ million b. Kim expects the cash flows to be $2.7 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 $1.62 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 $3.78 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 $18 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. It makes sense to proceed with the project today It makes sense to wait a year before deciding Investment Timing Option: Decision-Tree Analysis No Timing Option: Initial investment at t = 0 (in millions) Annual expected cash flow (in millions) Number of years cash flow expected Project cost of capital Timing Option: Initial investment at t = 1 (in millions) Number of years cash flow expected Probability that tax will be imposed Annual CF (in millions) if tax imposed, Years 2 to 21 Probability that tax will not be imposed Annual CF (in millions) if tax not imposed, Years 2 to 21 Project cost of capital No Timing Option: NPV of project (in millions) at t = 0, assuming no timing option Timing Option: NPV (in millions) at t = 0, if tax imposed NPV if tax imposed, reduced to zero if NPV negative NPV (in millions) at t = 0, if tax not imposed Expected NPV of project (in millions) at t = 0, with timing option Should firm proceed now or wait to do the project? $18.00 $2.70 20 12% $18.00 20 50% $1.62 50% $3.78 12% Formulas #N/A #N/A #N/A #N/A #N/A #N/A