Executives at Med- R- Us have decided to build a new production facility for the companys best-selling high blood pressure drug. The problem is to determine the size of the facility in terms of productions capacity. Last year, the company sold 1085000 units of the drug at a price of $ 13 per unit. The expect the demand to be normally distributed with a mean increasing by approximately 59000 units per year over the next 10 years with a standard deviation of 30000 units. They expect the price of the drug to increase with inflation at a rate of 3% per year. Variable production costs are currently $9 per unit and are also expected to increase in future rates at the rate of inflation. Other operating costs are expected to be $1.50 per unit of capacity in the first year of operation and increasing at the rate of inflation in subsequent years. The plant construction cost is expected to be $18 million for 1 million units of annual production capacity. The company can increase the annual production capacity above this level at a cost of $12 per unit of additional capacity. Assume the company must pay for the plant when it is completed, and all other cash flows occur at the end of each year. The company uses a 10% discount rate on cash flows for financial decisions.

a. Create a spread sheet model to compute the net present value (NPV) for this decisions and recommend the best option when comparing the two options below.

b. What is the expected NPV for a plant with a production capacity of 1.2 million units per year? c. What is the expected NPV for a plant with a production capacity of 1.4 million units per year?

c. What is the expected NPV for a plant with a production capacity of 1.4 million units per year?

Solution that is posted assumes that capacity in each year is 1310000. Why? I do not undersatnd where this number comes from.