Simonson Engineers Limited is considering building a new plant in Indonesia to produce goods for the Southeast Asian market. To date, $450,000 has been invested in market research and site surveys. The cost of building the plant will be $9 million and it will be in operation and paid for in one year's time. Estimates of the likely cash flows from the plant and their probability of occurrence are set out as follows:

Estimates for each year are independent of each other. The cost of capital for the business is 10%. Round present value factors to three decimals.

Required:
(a) Calculate the expected net present value of the proposed plant.
(b) Calculate the net present value of the worst possible outcome and the probability of its occurrence.
(c) Should the business invest in the new plant? Why?

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Estimated Cash Flows ($ millions) 2.0 3.5 4.0 2.5 3.0 5.0 3.0 4.0 5.0 2.5 3.0 6.0 Probability of Occurrence 0.2 0.6 0.2 0.2 0.4 0.4 0.2 0.7 0.1 0.2 0.5 0.3 Year 2 Year 3 Year 4 Year 5