Business, 09.03.2020 16:47 KiemaBear

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 $6 million. If the demand for new products is low, the company expects to receive $9 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $8 million. Were demand to be low, the company would expect $14 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million. In either case, the probability of demand being high is 0.60, and the probability of it being low is 0.40. 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: (Enter your answers in millions rounded to 1 decimal place.)

Plans NPV ($ million)
Small facility
Do nothing
Large facility

(b) The best decision to help Expando is:

A. to do nothing.
B. to build the large facility.
C. to build the small facility.

Answers: 3

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