Break even cash inflows and risk: Blair gasses and Chemicals is a supplier of highly purified gasses to semiconductor manufacturers. Blair is considering one of two plant designs. Blair will be the exclusive supplier for the subsequent 5 years. The first is Blair's standard plan which will cost 30 million to build. The second is for a custom plant which will cost 40 million to build. Blair estimates the cllient will order 10 million of product per year if the standard plant is constructed. If the custom plant is built, Blair expects to sell 15 million worth of product annually to its client. Blair has enough money to build either plant and in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 12%.
a) Find the NPV for each project. Are the projects acceptable?
b) Find the breakeven cash inflow for each project.
c) The firk has estimated the probabilities of achieving various ranges of cash inflows for the two projects as shown in the follwing table. What is the probability that each project will acheive at least the breakeven cash inflow found in part B?
Range of millions standard plant custom plany
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