Problem:
Nevada Enterprises is considering buying a vacant lot that sells for $2.0 million. If the property is purchased, the company's plan is to spend another $5 million today (t = 0) to build a hotel on the property. The cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year's legislative session. If the tax is imposed, the hotel is expected to produce cash inflows of $500,000 at the end of each of the next 15 years. If the tax is not imposed, the hotel is expected to produce cash inflows of $1,200,000 at the end of each of the next 15 years. The project has a 11% WACC. Assume at the outset that the company does not have the option to delay the project.
Required:
Question 1: What is the project's expected NPV if the tax is imposed?
Question 2: What is the project's expected NPV if the tax is not imposed?
Question 3: Given that there is a 50% chance that the tax will be imposed, what is the project's expected NPV if management proceeds with it today?
Note: Please show guided help with steps and answer.