I was already given the correct answer for Parts A-C. The equation I was given was = -(1.4+6)+ .5/.12*(1-1/1.12^15). I was wondering what the numbers correlate to in the problem though, specifically, where do these numbers come from in the text?.5/.12*(1-1/1.12^15) Real Options Boisjoly Enterprises is considering buying a vacant lot that sells for $1.4 million. If the property ispurchased, the company's plan is to spend another $6 million today to build a hotel on the property. The cashflows from the hotel will depend critically on whether the state imposes a tourism tax in this year's legislativesession. If the tax is imposed, the hotel is expected to produce cash flows of $500,000 at the end of each of thenext 15 years. If the tax is not imposed, the hotel is expected to produce cash flows of $1,200,000 at the end ofeach of the next 15 years. The project has a 12% WACC. Assume at the outset that the company does not have theoption to delay the project.a. What is the project's expected NPV if the tax is imposed?b. What is the project's expected NPV if the tax is not imposed?c. Given that there is a 45% chance that the tax will be imposed, what is the project's expected NPV ifmanagement proceeds with it today?d. Although the company does not have an option to delay construction, it does have the option to abandon theproject 1 year from now if the tax is imposed. If it abandons the project, it will sell the complete property 1 yearfrom now at an expected price of $7 million after taxes. Once the project is abandoned, the company will nolonger receive any cash flows. Assuming that all cash flows are discounted at 12%, will the existence of thisabandonment option affect the company's decision to proceed with the project today? Explain.

Given: Vacant lot = $1.4 million Hotel cost = $6 million With tax Cash flows =$500,000 With out tax…

I was already given the correct answer for Parts A-C. The equation I was given was = -(1.4+6)+ .5/.12*(1-1/1.12^15). I was wondering what the numbers correlate to in the problem though, specifically, where do these numbers come from in the text? .5/.12*(1-1/1.12^15)

I was already given the correct answer for Parts A-C. The equation I was given was = -(1.4+6)+ .5/.12(1-1/1.12^15). I was wondering what the numbers correlate to in the problem though, specifically, where do these numbers come from in the text? .5/.12(1-1/1.12^15)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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