Boardman Gases and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in place, Boardman will be the exclusive supplier for that semiconductor fabrication plant for the subsequent 10 years. Boardman is considering one of two plant designs. The first is Boardman's "standard" plant which will cost $38.8 million to build. The second is for a "custom" plant which will cost $53.4 million to build. The custom plant will allow Boardman to produce the highly specialized gases required for an emergency semiconductor manufacturing process. Boardman estimates that its client will order $12.8 million of product per year if the standard plant is constructed, but if the custom design is put in place, Boardman expects to sell $17.1 million worth of product annually to its client. Boardman has enough money to build either type of plant, and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 17.4%. a) Find the NPV for each project. b) Find the break-even cash inflow for each project. c) The firm has estimated te probabilities of achieving various ranges of cash inflows for the two projects, as shown in the table. Probability of achieving cash inflow in given range Range of cash inflow ($ millions) Standard Plant Custom Plant $0 to $5 0% 5% $5 to $8 10 10 $8 to $11 60 15 $11 to $14 25 25 $14 to $17 5 20 $17 to $20 0 15 Above $20 0 10
Boardman Gases and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in place, Boardman will be the exclusive supplier for that semiconductor fabrication plant for the subsequent 10 years. Boardman is considering one of two plant designs. The first is Boardman's "standard" plant which will cost $38.8 million to build. The second is for a "custom" plant which will cost $53.4 million to build. The custom plant will allow Boardman to produce the highly specialized gases required for an emergency semiconductor manufacturing process. Boardman estimates that its client will order $12.8 million of product per year if the standard plant is constructed, but if the custom design is put in place, Boardman expects to sell $17.1 million worth of product annually to its client. Boardman has enough money to build either type of plant, and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 17.4%.
a) Find the NPV for each project.
b) Find the break-even
c) The firm has estimated te probabilities of achieving various ranges of cash inflows for the two projects, as shown in the table.
|
Probability of achieving cash inflow in given range
|
||
|
Range of cash inflow ($ millions)
|
Standard Plant
|
Custom Plant
|
|
$0 to $5
|
0%
|
5%
|
|
$5 to $8
|
10
|
10
|
|
$8 to $11
|
60
|
15
|
|
$11 to $14
|
25
|
25
|
|
$14 to $17
|
5
|
20
|
|
$17 to $20
|
0
|
15
|
|
Above $20
|
0
|
10
|
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
a) the
The NPV for project "custom" is $ ??? (round to the nearest cent). How do I find the calculation for this?
by Bartleby Expert
