Question

  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 38.3 million to build. The second is for a​ "custom" plant which will cost $53.3 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 ​$11.7 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 16.6​%.

A. Find the NPV for each project. Are the projects​ acceptable?

B. Find the breakeven cash inflow for each project.

C. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects, as shown in the table..... What is the probability that each project will achieve the breakeven cash inflow found in part B?

Probability of achieving cash inflows in given range

Range of cash inflows 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

d. Which project is more​ risky? Which project has the potentially higher​ NPV? Discuss the​ risk-return trade-offs of the two projects.

e. If the firm wished to minimize losses​ (that is, NPV less than $ 0NPV<$0​), which project would you​ recommend? Which would you recommend if the goal was achieving a higher​ NPV?

Answer 1

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