The vice president of operations at Dintell Corporation, a majorsupplier of passenger-side automotive air bags, is considering a$50 million expansion at the firm’s Fort Worth, Texas, produc-tion complex. The most recent economic projections indicate a0.60 probability that the overall market will be $400 million per year over the next five years and a 0.40 probability that the mar-ket will be only $200 million per year during the same period.The marketing department estimates that Dintell has a 0.50probability of capturing 40 percent of the market and an equalprobability of obtaining only 30 percent of the market. The costof goods sold is estimated to be 70 percent of sales. For planningpurposes, the company currently uses a 12 percent discountrate, a 40 percent tax rate, and the MACRS depreciation sched-ule. The criteria for investment decisions at Dintell are (1) thenet expected present value must be greater than zero; (2) theremust be at least a 70 percent chance that the net present valuewill be positive; and (3) there must be no more than a 10 percentchance that the firm will lose more than 20 percent of the initialvalue.a. Based on the stated criteria, determine whether Dintellshould fund the project.b. What effect will a probability of 0.70 of capturing 40 per-cent of the market have on the decision?c. What effect will an increase in the discount rate to 15 per-cent have on the decision? A decrease to 10 percent?d. What effect will the need for another $10 million in thethird year have on the decision?
The vice president of operations at Dintell Corporation, a major
supplier of passenger-side automotive air bags, is considering a
$50 million expansion at the firm’s Fort Worth, Texas, produc-
tion complex. The most recent economic projections indicate a
0.60 probability that the overall market will be $400 million per year over the next five years and a 0.40 probability that the mar-
ket will be only $200 million per year during the same period.
The marketing department estimates that Dintell has a 0.50
probability of capturing 40 percent of the market and an equal
probability of obtaining only 30 percent of the market. The cost
of goods sold is estimated to be 70 percent of sales. For planning
purposes, the company currently uses a 12 percent discount
rate, a 40 percent tax rate, and the MACRS
ule. The criteria for investment decisions at Dintell are (1) the
net expected
must be at least a 70 percent chance that the
will be positive; and (3) there must be no more than a 10 percent
chance that the firm will lose more than 20 percent of the initial
value.
a. Based on the stated criteria, determine whether Dintell
should fund the project.
b. What effect will a probability of 0.70 of capturing 40 per-
cent of the market have on the decision?
c. What effect will an increase in the discount rate to 15 per-
cent have on the decision? A decrease to 10 percent?
d. What effect will the need for another $10 million in the
third year have on the decision?
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