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##### Even though the custom plant may be more risky it has a higher potential

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Module 2 - Problem: 12-3;Inputs;Standard Plant;Cost of capital;Number of years;Initial investment;Custom Plant;12%;5;\$30,000,000;Relevant Cash Flow;Operating cash flows;Year;Standard Plant;Cost of capital;12%;Initial investment;-\$30,000,000;1;\$10,000,000.00;2;\$10,000,000.00;3;\$10,000,000.00;4;\$10,000,000.00;5;\$10,000,000.00;NPV@12% cost of capital;\$6,047,762.02;\$40,000,000;Custom Plant;-\$40,000,000;\$15,000,000.00;\$15,000,000.00;\$15,000,000.00;\$15,000,000.00;\$15,000,000.00;\$14,071,643.04;Results;a.;NPV;Standard Plant;\$6,047,762.02;Acceptable;(Mutually exclusive project);b.;Cost of capital;Number of years;Initial investment;Breakeven cash inflow;c.;Probability;d.;Custom Plant;\$14,071,643.04;Acceptable;Acceptable;Breakeven Cash Inflow;Standard Plant;Custom Plant;12%;12%;5;5;-\$30,000,000;-\$40,000,000;\$8,322,291.96;\$11,096,389.28;Standard Plant;60%;Custom Plant;25%;Standard Plant;Custom Plant;More risky;Higher NPV;Even though the custom plant may be more risky it has a higher potential;NPV. The standard plant is less risky however does not have potential for a;high NPV. Therefore one must look at the combination of risk and return;when deciding on a project as well as the variability of cash inflows in;regards to risk.;e.;Standard Plant;Custom Plant;Best choice to minimize losses;Best choice to achieve a higher NPV;Module 2 - Problem: 12-12;Inputs;Module 2 - Problem: 12-14;Inputs;View Full Attachment;Additional Requirements;Level of Detail: Show all work

Paper#30150 | Written in 18-Jul-2015

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