plant, which will cost $ 30 million to build. The second is for a ― custom ‖ plant, which will cost $ 40 million to build. The custom plant will allow Blair to produce the highly specialized gases that are required for an emerging semiconductor manufacturing process. Blair estimates that its client will order $ 10 million of product per year if the traditional plant is constructed, but if the customized design is put in place, Blair expects to sell $ 15 million worth of product annually to its client. Blair has enough money to build either type of plant, and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 12 %. LG 2 a. Find the NPV for each project. Are the projects acceptable? b. Find the breakeven cash inflow for each project. c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects as shown in the following table. What is the probability that each project will achieve at least the breakeven cash inflow found in part b? d. Which project is more risky? Which project has the potentially higher NPV? Discuss the risk – return trade-offs of the two projects. e. If the firm wished to minimize losses( that is, NPV < $ 0), which project would you recommend? Which would you recommend if the goal were to achieve a higher NPV?
P12 – 6 Impact of inflation on investments You are interested in an investment project that costs $ 40,000 initially. The investment has a 5-year horizon and promises future end-of-year cash inflows of $ 12,000, $ 12,500, $ 11,500, $ 9,000, and $ 8,500, respectively. Your current opportunity cost is 6.5 % per year. However, the Fed has stated that inflation may rise by 1.5 % or may fall by the same amount over the next 5 years. LG 2 Assume a direct positive impact of inflation on the prevailing rates( Fisher effect) and answer the following questions.( Assume that inflation has an impact on the opportunity cost, but that the cash flows are contractually fixed and are not affected by inflation).