Breakeven cash inflows and risk Boardman Gasses 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 semicon- ductor plant. Once the new gas plant is in place, Boardman will be the exclusive sup- plier for that semiconductor fabrication plant for the subsequent 10 years. Boardman is considering one of two plant designs. The first is for Boardman's "standard" plant, which will cost $38.5 million to build. The second is for a "custom" plant, which wil cost $53.5 million to build. The custom plant will allow Boardman to produce the highly specialized gases required for an emerging semiconductor manufacturing pro- cess. Boardman estimates that its client will order $12.5 million of product per year if the standard plant is constructed, but if the custom design is put in place, Boardman expects to sell $17.5 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 16.9%.

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 2-3 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 risk-return tradeoffs of the two projects. e. If the firm wished to minimize losses (i.e., NPV

Range of cash flow ($in millions below) Standard Plant Custom Plant

$0-$5 0% 5%

$5-$8 10 10

$8-$11 60 15

$11-$14 25 25

$14-$17 5 20

$17-$20 0 15

Above $20 0 10