The vice president of operations at Dintell Corporation, a major supplier of passenger-side automotive air bags, is considering a $50 million expansion at the firm’s Fort Worth, Texas, production complex. The most recent economic projections indicate a 0.60 probability that the overall market will be $400 million per year over the next 5 years and a 0.40 probability that the market will be only $200 million per year during the same period. The marketing department estimates that Dintell has a 0.50 probability of capturing 40 percent of the market and an equal probability of obtaining only 30 percent of the market. The cost of goods sold is estimated to be 70 percent of sales. For planning purposes, the company currently uses a 12 percent discount rate, a 40 percent tax rate, and the MACRS depreciation schedule. The criteria for Investment decisions at Dintell are (1) the net expected present value must be greater than zero; (2) there must be at least a 70 percent chance that the net present value will be positive; and (3) there will lose more than 20 percent of the initial value.

a. Based on the stated criteria, determine whether Dintell should fund the project.

b. What effect will a probability of 0.70 of capturing 40 percent of the market have on the decision?

c. What effect will an increase in the discount rate to 15 percent have on the decision? A decrease to 10 percent?

d. What effect will the need for another $10 million in the third year have on the decision?