Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. If demand for new products is low, the company expects to receive $10 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 $11 million. Were demand to be low, the company would expect $12 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $16 million. In either case, the probability of demand being high is 0.30, and the probability of it being low is 0.70. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products.
Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. If demand for new products is low, the company expects to receive $10 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 $11 million. Were demand to be low, the company would expect $12 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $16 million. In either case, the probability of demand being high is 0.30, and the probability of it being low is 0.70. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
A calculate the NPV for the following: (answer in millions rounded to 1 decimal place)
Small facility ————- million
Do nothing ———— million
Large facility ————million
B. The best decision to help Expando is
A. To do nothing
B. To build the small facility
C. To build the large facility
Transcribed Image Text:Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The
company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. If demand for new
products is low, the company expects to receive $10 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 $11 million. Were demand to be low, the company would expect $12 million in discounted revenues
with the large plant. If demand is high, the company estimates that the discounted revenues would be $16 million. In either case, the
probability of demand being high is 0.30, and the probability of it being low is 0.70. Not constructing a new factory would result in no
additional revenue being generated because the current factories cannot produce these new products.
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