Question

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 $19 million. Kim expects the hotel will produce positive cash flows of $3.23 million a year at the end of each of the next 20 years. The project's cost of capital is 14%.

1. 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.

Answer 1

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$19,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 14%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 14% cost of capital is $2,392,711.68.

In case of any query, kindly comment on the solution.