Chapter 11.11

An auto plant that costs $120 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $160 million if the line is successful but only $70 million if it is unsuccessful. You believe that the probability of success is only about 45%. You will learn whether the line is successful immediately after building the plant.

a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions.)

a-2. Would you build the plant?

Yes

No

Suppose that the plant can be sold for $115 million to another automaker if the auto line is not successful.

b-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.)

b-2. Would you build the plant?

Yes

No