Java Express is looking to expand into the business of selling coffee beans. The firm...
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Java Express is looking to expand into the business of selling coffee beans. The firm estimates that the expansion would require an initial investment of \$2 million. Java Express expects that the new business line will produce positive cash flows of $300,000 per year for the next 20 years. The project's cost of capital is 13%. - What is the project's NPV? - Java expects the cash flows to be $300k per year but knows that this number may be much higher or lower. Specifically, there is a 50\% possibility in one year that an import tax on raw coffee beans will be imposed. If this is the case, the expected cash flows will be $220,000. However, there is also a 50% chance that the tax will not be imposed and the cash flows will be $380,000. Java Express is debating waiting a year to see if the import tax will be imposed before deciding on the project. If they wait, the cost of the initial investment will still be $2 million and the project will still run for 20 years. What is the NPV if this timing option is considered? Should Java Express decide to wait on the project? Hint: Draw out a decision tree to see what the options are and draw a time-line of the cash flows
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Java Express is looking to expand into the business of selling coffee beans. The firm estimates that the expansion would require an initial investment of \$2 million. Java Express expects that the new business line will produce positive cash flows of $300,000 per year for the next 20 years. The project's cost of capital is 13%. - What is the project's NPV? - Java expects the cash flows to be $300k per year but knows that this number may be much higher or lower. Specifically, there is a 50\% possibility in one year that an import tax on raw coffee beans will be imposed. If this is the case, the expected cash flows will be $220,000. However, there is also a 50% chance that the tax will not be imposed and the cash flows will be $380,000. Java Express is debating waiting a year to see if the import tax will be imposed before deciding on the project. If they wait, the cost of the initial investment will still be $2 million and the project will still run for 20 years. What is the NPV if this timing option is considered? Should Java Express decide to wait on the project? Hint: Draw out a decision tree to see what the options are and draw a time-line of the cash flows 