Question

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 $29.7 million to build. The second is for a "custom" plant which will cost $40.2 million 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 $9.8 million of product per year if the traditional plant is constructed, but if the customized design is put in place, Blair expects to sell $15.1 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 11.6%. 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 .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? a. The NPV for project "standard" is $ (Round to the nearest cent.) 6 Data Table - X Probability of achieving cash inflow in given range Project X Project Y 0% 5% Range of cash inflow (s millions) $0 to $5 $5 to $8 $8 to $11 $11 to $14 $14 to $17 $17 to $20 Above $20 Print Done Enter your answer in the answer box and then click Check Answer. 7 parts Clear All I remaining Check Answer

Answer 1

0 Break San Cash Infos Custom) 12.05 R e f 8-16 A 60%. 255. from wishes to minimize losseo Then project custom to be seluted due to more cash Deflows goal was aching tigher New then also project custom to be selected due to probability of 2 Ligher Npr. I (d) project custom has higher (NPV) ie 14.77155 (million projut Standard is more risky as Project standar has breakeven point of 3.95 years whereas for project Custom it is 3.38 year, as follows Standard Custom y1 2 9. 80 046 = 8.78 9.8 (30.7.5-7.55 9-8 (X2 O 704 2.04 98 w 0.644 = 6.32116 9.8(x 0.577 25.65 16.1 x 1 =3.52 16.) x2 = 121) 15.1(x) do -16.25 15-) = 3.72 15:10 = 8.6 C0 "tw Breakers - 34 yas a lot ze yard 6.39 291 +923.lt 8 Go to ! (x2372 9.72 >(3.37yn 30 gr (t) 0.85g 7.6572 23 Ss go) 2. 62

(In millim ) Break Even Cash Deflow Cuand alg Let Inflaws of project be x sy At Breakerin NPV-o Standard Custom) Project (Standard) Pooject Cash outflows 29.7 40.2 Cash Deflaws 9.88 for Syleast 15.1 & for syen NPV = Present Value - besont value o of cash Deflows Cash autflows task of capital = 11.60%. NPV = 984 (sy, 1.661) 15.14 (s), 1:1) - 29.7 G 40.2 2 NOV, PVCI (Pvco 25 do= x(sys, 11.607) (+) 2970 0= yesy, b) to to 40.20 2 3.68 84 anx=(8.16 pa) y 11.05mp. 29.70 3.638 x = 089600402740) 0.7194 (4 0 6446 (430-5771) 1.8960 420 621 420-734608.1996 +0.577) (- 40.20 +2 28 7 Cash Brokeren Inflaces Prjut Custom Standard - profect = 8. 16 million pa. 11.05 millonpa - 35.6769(+28.7 NPV = 5.9769 million $ 14.7155 (miles) Ans.(a) NPV - 5.9769 (million $ (standard) N = 4.77155 (million $1 Ccustomises