An auto plant that costs $200 million to build can produce a line of flexfuel ca

Question

An auto plant that costs $200 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $260 million if the line is successful but only $120 million if it is unsuccessful. You believe that the probability of success is only about 45%. You will learn whether the line is successful immediately after building the plant.

a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.) Expected NPV $ million a-2. Would you build the plant? Yes No

Suppose that the plant can be sold for $170 million to another automaker if the auto line is not successful.

b-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.) Expected NPV $ million

b-2. Would you build the plant? Yes No

Explanation / Answer

a-1. Expected NPV =probability at successful +probability at unsecusseful

successful is $260 mil at probability 45%

unsuccessful is $120 million at probablility 55%

NPV= 260*.45+120*.55

NPV =$183 millions

a-2. No

B-1. cashflow at sucessful +sold at cost

cashflow $260 mil at probablility 45%

Sold cost at $170 million at unsucessful 55%

Expected NPV =260*.45+170*.55

Expected NPV =$210.5 millions

b-2. Yes ,you can build the plant

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