The economics of development break-even with selling

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A company incurred a cost of $500,000 2 years ago to acquire the development rights to a property for which an offer of $1 million cash has been received now at time 0. The $500,000 acquisition cost incurred at year -2 will be written-off against the sale value if sold at time 0, or assume it has been amortized over the production years 1 through 5 in calculating the after-tax cash flows given. Any gain from the sale would be taxed as ordinary income at the effective tax rate of 40%. Development of the property would generate escalated dollar after-tax cash flow in millions of dollars of -1.5 in year 0, and +1.0, +1.8, +1.2, +0.8 and +0.4 in years 1 through 5 respectively. If the minimum escalated dollar DCFROR is 20%, should the company keep and develop the property or sell if there is considered to be a 60^ probability of development generating the year 1 through 5 positive cash flow, and 40% probability of failure generating zero cash flow in years 1 through 5? What development probability of success will make the economics of development a break-even with selling? Please work through excel if possible.

Reference no: EM132020750

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