Break even cash inflows and risk: Blair gasses and Chemicals is a supplier of highly purified gasses to semiconductor manufacturers. Blair is considering one of two plant designs. Blair will be the exclusive supplier for the subsequent 5 years. The first is Blair's standard plan which will cost 30 million to build. The second is for a custom plant which will cost 40 million to build. Blair estimates the client will order 10 million of product per year if the standard plant is constructed. If the custom plant is built, Blair expects to sell 15 million worth of product annually to its client. Blair has enough money to build either 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?

Range of millions standard plant custom plant

Range of Cash inflow (Millions)	Standard Plant	Custom plant
$0 to $5	0%	5%
$5 to $8	10	10
$8 to $11	60	15
$11 to $14	25	25
$14 to $17	5	20
$17 to $20	0	15
Above $20	0	10

d) Which project if riskier? 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 id the goal was to achieve a higher NPV.