An auto plant that costs $200 million to build can produce a line of flexfuel ca

Question

An auto plant that costs $200 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $260 million if the line is successful but only $120 million if it is unsuccessful. You believe that the probability of success is only about 45%. You learn whether the line is successful immediately after building the plant. a-1. Calculate the expected NPV.(Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.) Expected NPV $_____million a-2. Would you build the plant? Yes No Suppose that the plant can be sold for $170 million to another automaker if the auto line is not successful. b-1. Calculate the expected NPV.(Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.) Expected NPV $____million b-2. Would you build the plant? Yes No

Explanation / Answer

Answer a-1

Expected NPV => 45%(260 - 200) + 55%(120 - 200) => $17

Answer a-2

Hence, i would not build the palnt as npv is negative

Answer b-1

Expected NPV => 45%(260 - 200) + 55%(170 - 200) => $10.5

Answer b-2

Yes we would build the plant.

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