calculate partial labor and capital calculate partial labor and capital calculat
ID: 425913 • Letter: C
Question
calculate partial labor and capital calculate partial labor and capital calculate partial labor and capital Expando, Inc., is addition to their product line. The company that it could build at a cost of $5 million. If demand $9 million in discounted reven han considering the possibility of building an additional factory that would produce a neew considering two options. The first is a smail tacility at a cost of $5 million. If demand for new i currently products is low, the ues (present value of future revenues) with the d, if demand is high, it expects $14 million in discounted revenues option is to build a large factory at a cost of $10 million. Were demand to be low, the company would expec small facility On the other using the smail facility. The second million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million. In either case, the probability of demand being high is 0.50,a the probability of it being low is 0.50. Not constructing a new factory would result in no additional revenu being generated because the current factories cannot produce these new products a. Calculate the NPV for the following: (Leave no cells blank-be certain to enter "O" wherever required. Enter your answers in millions rounded to 1 decimal place. Plans Small facility Do nothing Large facility NPV million million million b. The best decision to help Expando is to do nothing. to build the small facility. to build the large facility.Explanation / Answer
NPV for any alternative
= Probability of low revenue occurring x Value of low revenue + Probability of high revenue occurring x Value of high revenue – Cost of building a facility
= 0.5 x Value of low revenue + 0.5 x Value of high revenue – Cost of building facility
NPV for small facility , $ million
= 0.5 x 9 + 0.5 x 14 – 5
= 4.5 + 7 – 5
= $ 6.5 million
NPV for large facility , $ million
= 0.5 x 12+ 0.5 x 15 – 10
= 6 + 7.5 – 10
= $3.5 million
NPV for cost of doing nothing = 0
PLAN
NPV
SMALL FACILITY
$6.5 MILLLION
DO NOTHING
0
LARGE FACILITY
$ 3.5 MILLION
PLAN
NPV
SMALL FACILITY
$6.5 MILLLION
DO NOTHING
0
LARGE FACILITY
$ 3.5 MILLION
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