Question
LLD corporation can invest $5 million in a new production plant. After construction of the plant, the price and the incremental increase in quantity sold
LLD corporation can invest $5 million in a new production plant. After construction of the plant, the price and the incremental increase in quantity sold will be either $2.5 and 6 million in case of a boom, or $1.5 and 3 in case of a bust.There is a 40% probability of boom and 60% probability of bust. The plant has an expected life of 5 years. Incremental fixed costs are $2 million a year, and variable costs are 1$ per quantity sold. The plant will be depreciated under the prime cost method, and a salvage value is $1 million. The opportunity cost of capital is 12% and the tax rate (T) is 40%. What is the projects NPV under the baseline assumptions?
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