Caravan Gaming Company is interested in developing a new facility in Brazil. The company estimates that the project would require an initial investment of $31 million. The company expects that the project will produce positive cash flows of $5,050,000 a year at the end of each of the next 15 years. The project's cost of capital is 14%.
a. Calculate the expected net present value of the project.
b. The company recognizes that the cash flows may be much higher or lower, depending on whether the host government imposes a large facility tax. One year from now, the company will know whether the tax will be imposed. There is a 45 percent chance that the tax will the imposed, in which case the yearly cash flows will be only $4.5 million and there is a 55 percent chance that the tax will not be imposed, in which case the yearly cash flows will be $5.5 million. If the company waits a year to start the project, the initial investment will remain at $31 million, and incoming cashflows will be delayed one year. Using decision tree analysis, calculate the value of the real option to wait a year before deciding. Use a discount rate of 14 percent.
c. Discuss 2-3 other factors that the company should consider in making a decision to go ahead with the project now or wait for one year.