Wansley Lumber is considering the purchase of a paper company,which would require an initial investment of $300 million. Wansleyestimates that the paper company would provide net cash flows of$40 million at the end of each of the next 20 years. The cost ofcapital for the paper company is 13%.
a. Should Wansley purchase the paper company?
b. Wansley realizes that the cash flows in Years 1 to 20 mightbe $30 million per year or $50 million per year, with a 50%probability of each outcome. Because of the nature of the purchasecontract, Wansley can sell the company 2 years after purchase (atYear 2 in this case) for $280 million if it no longer wants to ownit. Given this additional information, does decision-tree analysisindicate that it makes sense to purchase the paper company? Again,assume that all cash flows are discounted at 13%.
c. Wansley can wait for 1 year and find out whether the cashflows will be $30 million per year or $50 million per year beforedeciding to purchase the company. Because of the nature of thepurchase contract, if it waits to purchase, Wansley can no longersell the company 2 years after purchase. Given this additionalinformation, does decision-tree analysis indicate that it makessense to purchase the paper company? Is so, when? Again, assumethat all cash flows are discounted at 13%.
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Can someone please help me answer this in excel and show me theproper formulas? Thank you!
