Hart Lumber is considering the purchase of the White Paper Co.

5) Hart Lumber is considering the purchase of the White Paper Co. Purchase of White Paper would require an initial investment of $300 million. Hart estimates that White Paper would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital is 13%.

a) What is the NPV of the project to purchase White Paper today?

b) While Hart’s best guess is that the cash flows of White Paper will be $40 million a year, it recognizes that there is a 50% chance that the cash flows will be $50 million a year and a 50% chance that the cash flows will be $30 million a year for 20 subsequent years. One year from now, Hart will find out whether White Paper’s cash flows will be $30 or $50 million. Additionally, Hart recognizes that, if it wanted, it could sell White Paper 3 years from now for $280 million.

What is Hart’s best course of action if they wait, and the $30 million cash flow occurs? What is Hart’s best course of action if they wait, and the $50 million cash flow occurs? What is the NPV of the decision to wait to invest, and (potentially) sell White Paper?