Question

You are currently operating a tomato farm in Bulgaria. You are worried that you might be pressured to sell your farm for $1 to the local Bulgarian mafia boss during the next 2 years. If that happens you can file a claim with an insurance company and receive $100M. If the mafia boss leaves you in peace the business will be worth 400M in 2 years. A wealthy Russian has just offered you $160M for the farm. The cost of capital for the project is 16%. Should you sell now? (please include a decision tree to illustrate your reasoning).

Answer 1

N of CF If sold local mafia year Of o $+ 2 $$o py of cash Praia 0.8621 0.7432 In flows (X2) DCF $ 0-8621 $75.0595 $75.9216 praf worth of bussiness DCEX (2) CF year PV@ 167 027432 $297.2652 yoona $ 297.2652 py of business It form is sold today Amount to read $ 160m o seu the farm-today sell the to $75.9216 yes Project 8297-2652 Wait for ayears.