Blair Gasses and Chemicals is a supplier of highly purified gases to semiconduct

Question

Blair Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Bair 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 $30 million to build. The second is for a "custom" plant, which will cost $40 million to build. The custom plant will allow Blair to produce the highly specialized gases that are required for an emerging semiconductor manufacturing process. Blair estimates that its client will order $10 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 million worth of product annually to its client. Blair has enough money to build either type of plan, and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 12%.

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

Find the breakeven cash inflow for each project.

The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects as shown in the following tab. What is the probability that each project will achieve at least the breakeven cash inflow found in part b?

Explanation / Answer

Ans)

Traditionl Plant Cost Custom Plant Cost 30 40 Life 5 5 Inflow 10 15 Discount Factor 12 12 Present value of inflow 10*(12pvaf for five years 15*(12pvaf for five years 3.60478 36.0478 54.0717 NPV 30-36.0478 40-54.0717 6.0478 14.0717 NPVAT20% 2.4883 24.883 37.3245 NPV -5.117 -2.6755 IRR 12+-5.117/6.0478*8 12+-2.6755/14.01717*8 18.76 13.52 PV Index Probiloty Pvof INFLOW /PV of OUTFLOW 1.20 1.35

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