Breakeven cash inflows and risk, Blair Gases and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Blair to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in? place, Blair will be the exclusive supplier for that semiconductor fabrication plant for the subsequent 5 years. Blair is considering one of two plant designs. The first is? Blair's "standard" plant which will cost ?$30million to build. The second is for a? "custom" plant which will cost ?$ 40million to build. The custom plant will allow Blair to produce the highly specialized gases that are required for an emergency semiconductor manufacturing process. Blair estimates that its client will order ?10.0 million of product per year if the traditional plant is? constructed, but if the customized design is put in? place, Blair expects to sell ?$ 15.0 million worth of product annually to its client. Blair 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 12.0?%.
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 LOADING... . What is the probability that each project will achieve the breakeven cash inflow found in part ?(b?)??
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 <$0?), which project would you? recommend? Which would you recommend if the goal was achieving a higher? NPV?