I need the answer but also need to see how to work the problem Expando, Inc., is
ID: 402094 • Letter: I
Question
I need the answer but also need to see how to work the problem
Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $11 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 $15 million. In either case, the probability of demand being high is .80, and the probability of it being low is .20. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products.
Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in millions rounded to 1 decimal place.)
a.Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in millions rounded to 1 decimal place.)
Explanation / Answer
small facility NPV = .2*10m + .8*11m - cost
= 2.8 million
large factory NPV= .2*11+.8*15- 9 = 5.2 million