Firm X is considering building a plant that will manufacture heaters powered by natural gas. The...

  

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Firm X is considering building a plant that will manufacture heaters powered by natural gas. The plant will cost $1 million to build, which the firm must pay immediately if it builds the plant. If built, the plant will produce 2,000 heaters this year. It will then become completely obsolete (with no salvage value) at year-end due to advancing technology. In addition to the expenditure to build the plant, the cost of manufacturing each heater will be $1,000 for labor and materials, payable at the end of the year. Suppose that there is a forward market for heaters with a forward price of SF per heater delivered in a year. What is the minimum forward price SF for which building the plant is a positive NPV project for Firm X. Assume that the risk-free rate is 4%. Firm X is considering building a plant that will manufacture heaters powered by natural gas. The plant will cost $1 million to build, which the firm must pay immediately if it builds the plant. If built, the plant will produce 2,000 heaters this year. It will then become completely obsolete (with no salvage value) at year-end due to advancing technology. In addition to the expenditure to build the plant, the cost of manufacturing each heater will be $1,000 for labor and materials, payable at the end of the year. Suppose that there is a forward market for heaters with a forward price of SF per heater delivered in a year. What is the minimum forward price SF for which building the plant is a positive NPV project for Firm X. Assume that the risk-free rate is 4%.

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Initial Investent to bulid a plant 1000000 Additional expenses per year No of heaters produced ... View the full answer