Celina, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $7 million. If demand for new products is low, the company expects to receive $9 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $13 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $11 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million. In either case, the probability of demand being high is 0.20, and the probability of it being low is 0.80. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products.

QUESTION 1:

Calculate the NPV for the following:

PLANS: NPV? In millions

Small Facility - $?

Do Nothing - $?

Large Facility - $?

QUESTION 2:

What is the best decision to help Celina is