Problem 4-8 Expando, Inc., is considering the possibility of building an additio
ID: 392213 • Letter: P
Question
Problem 4-8 Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $9 million. If demand for new products is low, the company expects to receive $11 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $12 million. Were demand to be low, the company would expect $13 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $18 million. In either case, the probability of demand being high is 0.50, and the probability of it being low is 0.50. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. a. Calculate the NPV for the following: (Leave no cells blank - be certain to enter "o" wherever required. Enter your answers in millions rounded to 1 decimal place.) Plans NPV Small facility Do nothing Large facility million million million b. The best decision to help Expando is to build the large facility. to build the small facility. to do nothing.Explanation / Answer
1.a. for small plant
the cost is $9,000,000, the expected revenues are $11 million if the demand is low and $12 million if the demand is high. The probability of happening these two are 0.5 each.
now the estimated income= $11,000,000*0.5+$12,000,000*0.5= $5.5 Mill+ $6 mill= $11. 5 millions
the profit= $11.5 Mill- $9 mill= $2.5 Millons
per cent = 2.5/9= 27.77% is the return
for large plant
estimated cost is $12 millions, and the estimated revenues are= $12 Mill *0.5+ $18 Mill *0.5= $6 +$9 Millons
total income is= $15 Millons and the profit is= $15 Millons- $12 Mill= $3 Millons
per cent= 3/12= 25%
b. if we look into rate of return, small facility is best, or if we look the amount of return large facility is best.
I think option B is correct
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