DACA is considering building a mall at the cost of $9 million at
t=0. The project is expected to last for 5 years with revenues of
$3.8 million per year, cost of 1 million per year and the
depreciation expense is fixed at $0.9 million per year. The net
present value (NPV) of the project should be calculated assuming
that the mall will be sold for $1.5 million (after taxes) at the
end of year 5. Notice that no depreciation expenses (tax shields)
will be possible after selling the mall. The cost of capital is
assumed to be 12% and tax rate 15%. Estimate the NPV of the project
and answer the following questions: 1. What is the NPV of the
project? Select A, B or C 2. Suppose now that there is a 50%
probability that the government impose a new income tax such that
instead of 15% , it goes up to 35% What is the expected NPV under
this scenario? Select D, E or F 3. Now assume that at the end of
the year 1 the company will be able to know if the government
passes the new tax of 35%. In that case DACA has the option to
abandon the project and sell the mall in $8.2 million. What is the
Expected NPV with this option to abandon? Select G, H or I 4. What
is the value of the option to abandon? select J, K, or L
Question 3 options:
A) The NPV of the project is $1.97 million
B) The NPV of the project is $1.79 million
C) The NPV of the project is $0.917 million
D) The Expected NPV of the project is $3.22 million
E) The Expected NPV of the project is $0.232 million
F) The Expected NPV of the project is -$3.22 million
G) The Expected NPV with option to Abandon is -$2.75 million
H) The Expected NPV with option to Abandon is $0.572 million
I) The Expected NPV with option to Abandon is $2.57 million
J) The Value of the Option is $0.340 million
K) The Value of the Option is zero
L) The Value of the Option is $1.454 million
