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Expando, Inc., is considering possibility of building the additional factory which would create a new addition to their product line. The company is at present considering two options. The first is small facility which it could build at a cost of $8 million. If demand for new products is low, the company anticipates receiving $10 million in discounted revenues (present value of future revenues) with the small facility. On other hand, when demand is high, it expects $11 million in discounted revenues by using the small facility. The second option is to create a large factory at a cost of $9 million. Were demand to be low, the company would anticipate $11 million in discounted revenues with large plant. If demand is high, the company approximates that the discounted revenues would be $15 million. In either case, the probability of demand being high is .80, and probability of it being low is .20. Not constructing the new factory would result in no additional revenue being generated since the current factories can’t manufacture these new products.

a. Evaluate the NPV for following: (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in millions rounded to 1 decimal place.)

Operation Management, Management Studies

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  • Reference No.:- M914532

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