Reliable Industries is considering the construction of a power plant investment in India. Reliable analysts calculate that the cost of building the plant is $600 million, and the IRR of the plant is 13%. The analysts also estimate that given the experience of building the first plant, a second plant can be built for $550 million, and additional plants can be built for $500 million each.
1. How would you go about evaluating whether to build or not to build this power plant in India?
2. Are you evaluating a project or a strategy?
3. How does the risk associated with the power plant strategy compare with the risk associated with the individual power plants?