Hatch Corporation is thinking of building a Survivor Camp far out in the corn fields outside of Chicago. Similar camps a

[answerhappygod]

Hatch Corporation is thinking of building a Survivor Camp far
out in the corn fields outside of Chicago. Similar camps already
exist around the US. The investment will cost $250M and cash flow
will start arriving one year after the investment. Because of the
violent and dangerous nature of such camps, the CEO of Hatch
Corporation estimates that there is a probability p = 0.1 of the
industry being subject to a lawsuit this year. The lawsuit is
equally likely to be successful and to be dismissed. In case the
lawsuit is successful, all such camps will be banned and cash flows
will be 0 forever. If the lawsuit is dismissed, the extra attention
created will increase demand and cash flows are expected to go up
to $100M per year forever. If there is no lawsuit at all this year,
the cash flows are expected to be $50M forever.
a) Assuming the CEO decides to invest today, what is the NPV of
the project?
b) Now assume that the CEO decides to wait until year 1 to make
the investment. (Of course, cash flows will not start arriving
until in year 2 then.) Assume that the CEO can make the investment
decision after observing whether there was a lawsuit or not and the
outcome of the lawsuit. What is the NPV (as of year 0) of this
strategy? Is he better or worse off than when he invested at 0?
Explain the intuition.
c) Now assume the risk of the lawsuit is p=0.3 instead of 0.1.
Does this change your answer to question b)? Explain the intuition
(and do the numbers, of course).
d) Now assume that the investment is reversible, meaning that
you will be able to get your $250M investment back in any of the
three scenarios by selling the land and the equipment if you so
choose (of course, you would miss out on the later revenues then).
Assume p=0.3 as in c). How will this affect the timing of your
investment? Explain the intuition.