Task1. Real options Nevada Enterprises is considering purchasing a vacant lot that sells for $1.0 million. When the property is bought, the company's plan is to spend another $7 million today (t = 0) to build up a hotel on the property. The cash flows from the hotel will depend critically on whether the state imposes the tourism tax in this year's legislative session. When the tax is imposed, the hotel is anticipated to produce cash inflows of $500,000 at the end of each of the next 15 years. When the tax is not imposed, the hotel is anticipated to produce cash inflows of $1,800,000 at the end of each of the next 15 years. The project has a 13% WACC. Suppose at the outset that the company does not have the option to delay the project.
Question1. What is the project's expected NPV if the tax is imposed?
Question2. What is the project's expected NPV if the tax is not imposed?