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##### Caravan Gaming Company is interested in developing...

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Caravan Gaming Company is interested in developing a new facility in Brazil. The company estimates that the project would require an initial investment of \$31 million. The company expects that the project will produce positive cash flows of \$5,050,000 a year at the end of each of the next 15 years. The project's cost of capital is 14%. a. Calculate the expected net present value of the project. b. The company recognizes that the cash flows may be much higher or lower, depending on whether the host government imposes a large facility tax. One year from now, the company will know whether the tax will be imposed. There is a 45 percent chance that the tax will the imposed, in which case the yearly cash flows will be only \$4.5 million and there is a 55 percent chance that the tax will not be imposed, in which case the yearly cash flows will be \$5.5 million. If the company waits a year to start the project, the initial investment will remain at \$31 million, and incoming cashflows will be delayed one year. Using decision tree analysis, calculate the value of the real option to wait a year before deciding. Use a discount rate of 14 percent. c. Discuss 2-3 other factors that the company should consider in making a decision to go ahead with the project now or wait for one year. Please show work in Excel.

Paper#10212 | Written in 18-Jul-2015

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