Question

Britton Carter is interested in building a new hotel in Queenstown, New Zealand. His company estimates that the hotel would require an initial investment of $20 million, would produce a positive cash flow of $6.5 million a year and at the end of each of the next 15 years can be salvaged (after tax) $10 million at t=15. The company recognizes that the cash flow could in fact be much higher or lower depending on whether that area becomes a popular tourist area. It is believed that at the end of two years, a 15% chance exists in the tourism will not be spreading in that direction and yearly cash flow will be only $2.5 million for 15 years within after-tax salvage value of $7 million and 85% chance exists that tourism will be heading that way in the yearly cash flow will be $8.5 million for 15 years with an after-tax salvage value of $18 million. If the firm waits two years, the initial investment will be $25 million. The project's cost of capital is 12%. Should the firm proceed with the project today or should it wait two years before deciding? (Round NPVS to the nearest dollar) choose the closest answer

A. wait two years, the NPV of building today is $2,745,595 worst in the NPV for waiting two years.

B. Build it now since the NPV of building today is $2,38,340 better than the NPV for waiting two years

C. Wait two years the NPV of building today is $3,652,072 worst in the NPV for waiting two years

D. Build it now since the NPV of building today is $4122163 better than the NPV of waiting two years

E. Build it now since the NPV a building today is $1,580,882 better than the MPV for waiting two years

Answer 1