Question

An auto plant that costs $200 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $270 million if the line is successful but only $120 million if it is unsuccessful. You believe that the probability of success is only about 52%. You will learn whether the line is successful immediately after building the plant. Calculate the expected NPV.

Answer 1

NPV = - $ 2

Step-by-step explanation:

given data

costs = $200 million

present value successful = $270 million

unsuccessful = $120 million

probability of success = 52%

to find out

expected NPV

solution

we know cost is = $200

and Cash flows if Successful = $270 and Probability = 52%

so

Cash flows if unsuccessful = $120 and Probability will be= 100% - 52% = 48 %

so

expected Present value of the venture will be

expected Present value of the venture = $270 × 52% + $120 × 48 %

expected Present value of the venture = $198

so NPV = $198 - $200

NPV = - $ 2