Breakeven cash inflows and risk Boardman Gases and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in place, Boardman will be the exclusive supplier for that semiconductor fabrication plant for the subsequent 10 years. Boardman is considering one of two plant designs. The first is Boardman's "standard" plant which will cost $38.3 million to build. The second is for a "custom" plant which will cost $52.7 million to build. The custom plant will allow Boardman to produce the highly specialized gases required for an emergency semiconductor manufacturing process. Boardman estimates that its client will order $11.6 million of product per year if the standard plant is constructed, but if the custom design is put in place, Boardman expects to sell $17.3 million worth of product annually to its client. Boardman 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 16.8%. a. The NPV for project standard" is $ (Round to the nearest cent.) The NPV for project "custom" is $ (Round to the nearest cont.) Are the projects acceptable? (Select the best answer below.) O A. Because the NPV for project standard" is positive, project standard" is acceptable. Because the NPV for project "custom"is positive, project "custom" is also acceptable. B. Because the NPV for project standard" is positive, project "standard" is acceptable. Because the NPV for project "customis negative project "custom" is unacceptable. OC. Because the NPV for project 'standard" is negative project "standard" is unacceptable. Because the NPV for project "custom" is negative project "custom" is also unacceptable. OD. Because the NPV for project "standard" is negative project "standard" is unacceptable. Because the NPV for project "custom" is positive, project "custom" is acceptable. b. The PMT for project standard' is $]. (Round to the nearest cent.) The PMT for project "custom is $ (Round to the nearest cent.) 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 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)? (Select the best answer below.) A. The probability that project "standard" will achieve cash flows of spate Dannually is 60%. The probability that project "custom" will achieve cash flows of annually is 20%. B. The probability that project "standard" will achieve cash flows of annually is 25%. The probability that project "custom" will achieve cash flows of $1. annually is 60%. C. The probability that project "standard" will achieve cash flows of annually is 25%. The probability that project "custom" will achieve cash flows of 14 annually is 25%. D. The probability that project "standard" will achieve cash flows of sekaannually is 60%. The probability that project "custom" will achieve cash flows of $112.d annually is 25%. d. Which project is more risky? Which project has the potentially higher NPV? Discuss the risk-return trade-offs of the two projects. (Select the best answer below.) A. Both project'standard" and project "custom" are equally highly risky. B. Project "custom" is more risky and has a higher potential NPV. Project "standard" has less risk and less return, while project "custom" has more risk and more return, thus the risk-return trade-off. OC. Project "standard" is more risky and has a higher potential NPV. Project "custom" has less risk and less return, while project "standard" has more risk and more return, thus the risk-return trade-off. D. Both project "standard and project "custom" are equally low risk projects, Range of cash inflow ($ millions) $0 to $5 $5 to $8 $8 to $11 $11 to $14 $14 to $17 $17 to $20 Above $20 Standard Plant 0% 10 60 25 5 0 0 Custom Plant 5% 10 15 25 20 15 10
