fansley Lumber is considering the purchase of a paper company which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the mper company is 16%. a. Should Wansley purchase the paper company? -Select- b. Wansley realizes that the cash flows in Years 1 to 20 might be $27 million per year or $53 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 16%. -Select- c. Wansley can wait for 1 year and find out whether the cash flows will be $27 million per year or $53 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits and purchases, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 16%. -Select-
fansley Lumber is considering the purchase of a paper company which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the mper company is 16%. a. Should Wansley purchase the paper company? -Select- b. Wansley realizes that the cash flows in Years 1 to 20 might be $27 million per year or $53 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 16%. -Select- c. Wansley can wait for 1 year and find out whether the cash flows will be $27 million per year or $53 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits and purchases, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 16%. -Select-
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter26: Real Options
Section: Chapter Questions
Problem 3P: Wansley Lumber is considering the purchase of a paper company, which would require an initial...
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Transcribed Image Text:Wansley Lumber is considering the purchase of a paper company which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the
paper company is 16%.
a. Should Wansley purchase the paper company?
-Select- V
b. Wansley realizes that the cash flows in Years 1 to 20 might be $27 million per year or $53 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this
case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 16%.
-Select- V
c. Wansley can wait for 1 year and find out whether the cash flows will be $27 million per year or $53 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits and purchases, Wansley can no longer sell the
company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 16%.
-Select-
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