I'm in second year university in Introduction to Finance and I'm struggling with this question. An auto
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Question:
I'm in second year university in Introduction to Finance and I'm struggling with this question.
An auto plant that costs $50 million to build can produce a new line of cars that will produce net cash flow of $50 million per year if the line is successful, but only $8.5 million per year if it is unsuccessful. You believe that the probability of success is about 10 percent. The auto plant is expected to have a life of 27 years and the opportunity cost of capital is 5 percent.
a) what is the expected NPV of building the plant?
b) If the plant could be sold for $135 million to another automaker in one year if the auto line is not successful, what is the expected net present value of building the plant?
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