An auto plant that costs $100 million to build can produce a new line of cars that

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An auto plant that costs $100 million to build can produce a new line of cars that will generate cash flows with a present value of $140 million if the line is successful, but only

$50 million if it is unsuccessful. You believe that the probability of success is only about 50 percent.

a. Would you build the plant?

b. Suppose that the plant can be sold for $90 million to another automaker if the line is not successful. Now would you build the plant?

c. Illustrate this option to abandon using a decision tree.

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Principles of Corporate Finance

ISBN: 978-0072869460

7th edition

Authors: Richard A. Brealey, Stewart C. Myers

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Question Posted: Jun 08, 2011 05:49 AM

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An auto plant that costs $100 million to build can produce a new line of cars that

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a The expected value of the NPV for the plant is 05 140 milli...View the full answer

Principles of Corporate Finance

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