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An auto plant costs $100 million to build but can produce a new line of cars that will produce cash flows with a present value of $140 million if the line is successful, but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50 percent.

A) Would you build the plant?

B) Suppose that the plant can be sold for $90 million to another automaker if the auto line is not successful. Now would you build the plant?

C) Illustrate the option to abandon in (b) using a decision tree.

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Solution Summary

This solution is comprised of answers related with project plan. The expert evaluates the probability of success in several scenarios.

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Answer:
Given that,
Investment on the plant = $100 million
Present value of cash flow if the line is successful = $140 million
Present value of cash flow if the line is unsuccessful = $50 million
Probability of success/failure=50%
(A) As we ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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