Can this be done in excel? I would like to have a solution on excel. Thanks Kim

Question

Can this be done in excel? I would like to have a solution on excel. Thanks

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects that the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project"s cost of capital is 13 percent.

a. What is the project"s net present value?

b. While Kim expects the cash flows to be $3 million a year, it recognizes that the cash flows could, in fact, 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 percent chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50 percent chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait 1 year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13 percent. Using decision tree analysis, should Kim proceed with the project today or should it wait a year before deciding?

Explanation / Answer

1. NPV is 1.074 Mn

Calculated as follow

Type formula =PV(0.13,20,3000000,0) in excel, then add intial Cashflow of 20 mn

2. if wait for 1 year

a. Posibility one of tax imposition, Cashflow will be 2.2 Mn per year then NPV = -4.54 mn (negative)

b. Possibility second , No tax then Cashflow will be 3.8 mn per year then NPV = + 6.69 mn

now Cumulative NPV = 50% of -4.53 + 50% of 6.69Mn

= +1.074 Mn

now discounting it with 13% for one year to bring it at 0 year therefore NPV = 0.95 mn

Solution,

Kim Hotels should start now & neednot to wait till one year since NPV is more if Kim starts now i.e NPV is 1.074 Mn

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