an auto plant that costs $160 million to build can produce a line of flexfuel ca
ID: 2652802 • Letter: A
Question
an auto plant that costs $160 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $250 million if the line is successful but only $60 million if it is unsuccessful. You believe that the probability of success is only about 52%. You learn whether the line is successful immediately after building the plant.
Calculate the expected NPV. (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.)
Would you build the plant?
Calculate the expected NPV. (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)
Would you build the plant?
an auto plant that costs $160 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $250 million if the line is successful but only $60 million if it is unsuccessful. You believe that the probability of success is only about 52%. You learn whether the line is successful immediately after building the plant.
Explanation / Answer
A) Calculation of NPV if the project is successful
Investment = $160 millons
Net flow = $250
NPV = $250m/1.1 - $160M
A 1) Answer: Expected NPV = $67.27 millions (considering duration of 1 year)
A 2) Answer = Yes, should build the plant as NPV is positive.
B) the plant can be sold for $90 million to another automaker if the auto line is not successful
Investment = $160 millons
Net flow = $60 millions + sold out value i.e. $90millions
NPV = $150m/1.1 - $160M
A 1) Answer: Expected NPV = -$23.64 millions
A 2) Answer = No, should not build the plant as NPV is negative. (considering duration of 1 year)
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