Blair Gasses 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 Blairs 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 plant, and, in the absence

of risk differences, accepts the project with the highest NPV. The cost of capital is 12%.

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 following table. What is the probability

that each project will achieve at least the breakeven cash inflow found in part b?

d. Which project is more risky? Which project has the potentially higher NPV?

Discuss the riskreturn trade-offs of the two projects.

e. If the firm wished to minimize losses (that is, NPV 6 $0), which project would

you recommend? Which would you recommend if the goal were to achieve a

higher NPV?