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 ).