Connectics Inc. (CI) is thinking about constructing a new manufacturing facility for connectors. Based on current projections, the facility is expected to produce auto connectors, which are in high demand. However, there is a 50% chance that CI will win a NASA contract to make spacecraft connectors, which could be produced at the same factory and command higher margins. If CI wins the contract, they would stop making auto connectors at the facility and would make spacecraft connectors instead until the contract runs out. The problem is that CI does not know when it will learn whether it has won the contract for the spacecraft connectors. It could learn this year (year 0), next year (year 1), or the year after (year 2), each with equal probability. The facility will require an immediate $850 million investment. The cash flows from producing auto connectors are expected to be $40 million per year (starting in year 1), and will grow at 2% forever. If CI wins the contract, the cash flows from producing spacecraft connectors are expected to be $50 million per year starting in the first year after the contract is awarded, also growing at 2% per year. The contract lasts five years, after which the facility will return to making auto connectors. The appropriate discount rate for the facility is 7%. What is the NPV of the decision to construct the new connector manufacturing facility?

Answer rating: 100% (QA)

The NPV of the decision to construct the new connector manufacturing facility is 10654060 Y... View the full answer