An auto plant that costs $100 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. 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.) a-2.Would you build the plant? Suppose that the plant can be sold for $95 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 1 decimal place.) b-2. Would you build the plant?

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Asked Jun 8, 2019
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An auto plant that costs $100 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. 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.)

 

a-2.Would you build the plant?

 

Suppose that the plant can be sold for $95 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 1 decimal place.)

 

b-2. Would you build the plant?

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Expert Answer

Step 1

a)-1

Calculation of expected NPV:

Unsuccessful cash flow
Expected NPV (Successful cash flow x Probability of succe ss)
xProbability of unsuccess
-(($140m - $100m)x 0.50) +((S50m - $100m)x 0.50)
=$20m - $25m
=-$5million
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Unsuccessful cash flow Expected NPV (Successful cash flow x Probability of succe ss) xProbability of unsuccess -(($140m - $100m)x 0.50) +((S50m - $100m)x 0.50) =$20m - $25m =-$5million

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Step 2

a)-2

Since the net present value is negative it is not advisable to build the plant.

Step 3

b)-1)

Calculation of expected ...

Unsuccessful cash flow
Expected NPV (Successful cash flow x Probability of succe ss)+
(XProbability of unsuccess
((s140m -S100m) x 0.50) +((s95m -$100m)x 0.50)
S20m-$2.5m
= S17.5million
help_outline

Image Transcriptionclose

Unsuccessful cash flow Expected NPV (Successful cash flow x Probability of succe ss)+ (XProbability of unsuccess ((s140m -S100m) x 0.50) +((s95m -$100m)x 0.50) S20m-$2.5m = S17.5million

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