121 ,( 43% 9:52 PM Expando, Inc, is considering the possiblity of buildng an add
ID: 361096 • Letter: 1
Question
121 ,( 43% 9:52 PM Expando, Inc, is considering the possiblity of buildng an addmmai factory that would produc a new addition to their options. The frst is a small faclity that it could build at a cost of 89 mllion. if demand for new products is low, tha company expects to receive $9 milion in discounted revenues (present value of future revenues) with the small facilty. On the other hand, if demand is high, texpedts $12 milion in discounted revenues using the small faclity. The second option is to build a large factory at a cost of $10 milion. Were demand to be low the company would expect $12 milion in discoumed revenuea ith the large plant. If demand is high, the company estimates that the discounted revenues would be $15 milion. In either case, the probability of demand being high is 040 and the probability of it being low is 060. Not constructing a new factory would result in no additional revenue beng generated because the current factories cannot produce these new products. a. Cakculate the NPV tor the following: (Leave no cells blank be certain to enter O wherever required. Enter your answers in millions rounded to 1 decimal place.) Sll facility Do nothint Large facility 6.0 million 0 million 132 million b. The beat decision to help Expando a todonothing. to build the large facilty build the small facility. Thank you Very interesting!thanks for haring. Reply Reply all ForwardExplanation / Answer
Net present value of any option
= Discounted revenue adjusted for probabilities under low and high demand – Cost to build
= ( Probability of high demand x Discounted revenue under high demand + Probability of low demand x Discounted revenue under low demand ) – Cost to build
= ( 0.4 x Discounted revenue under high demand + 0.6 x Discounted revenue under high demand ) – Cost to build
Therefore,
NPV of the small facility , $ million
= ( 0.4 x 12 + 0.6 x 9 ) - 9
= 4.8 + 5.4 – 9
=10.2 – 9
= 1.2
Similarly , NPV for the large facility
= ( 0.4 x 15 + 0.6 x 12 ) – 10
= 6 + 7.2 – 10
= 13.2 – 10
= 3.2
Not constructing any factory would not have any revenue as well as cost items. Hence , its NPV will be Zero
PLAN
NPV
Small facility
1.2
Million
Do nothing
0
Million
Large facility
3.2
Million
Since, the NPV is highest for “Large Facility”, best decision would be to expand for Large Facility
BEST DECISION TO HELP TO EXPAND IS TO BUILD THE LARGE FACILITY
PLAN
NPV
Small facility
1.2
Million
Do nothing
0
Million
Large facility
3.2
Million
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.