Transcribed Image Text: Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two
Transcribed Image Text: Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The
company is currently considering two options. The first is a small facility that it could build at a cost of $7 million. If demand for new
products is low, the company expects to receive $11 million in discounted revenues (present value of future revenues) with the small
facility. On the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. The second option is
to build a large factory at a cost of $12 million. Were demand to be low, the company would expect $13 million in discounted revenues
with the large plant. If demand is high, the company estimates that the discounted revenues would be $17 million. In either case, the
probability of demand being high is 0.50, and the probability of it being low is 0.50. Not constructing a new factory would result in no
additional revenue being generated because the current factories cannot produce these new products.
a. Calculate the NPV for the following: (Leave no cells blank – be certain to enter “O” wherever required. Enter your answers in
millions rounded to 1 decimal place.)
b. The best decision to Expando is
O to build the large facility.
O to do nothing.
O to build the small facility.
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