Question

5.

Problem 26-01 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 $16 million. Kim expects the hotel will produce positive cash flows of $2.72 million a year at the end of each of the next 20 years. The project's cost of capital is 14% 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. Round your answer to two decimal places. million

Answer 1

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = Annuity * [1 - 1 / (1 + r)ⁿ] / r - Initial investment

Net present value = 2.72 * [1 - 1 / (1 + 0.14)²⁰] / 0.14 - 16

Net present value = 2.72 * [1 - 0.072762] / 0.14 - 16

Net present value = 2.72 * 6.623131 - 16

Net present value = 2.01 million