Project Risk Assignment | Homework For You

Boardman Gases and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in​ place, Boardman will be the exclusive supplier for that semiconductor fabrication plant for the subsequent 10 years. Boardman is considering one of two plant designs. The first is ​ Boardman’s “standard” plant which will cost ​$39.1 million to build. The second is for a​ “custom” plant which will cost ​$54.1 million to build. The custom plant will allow Boardman to produce the highly specialized gases required for an emergency semiconductor manufacturing process. Boardman estimates that its client will order​$12.3 million of product per year if the standard plant is​ constructed, but if the custom design is put in​ place, Boardman expects to sell ​$16.7 million worth of product annually to its client. Boardman has enough money to build either type of​ plant, and, in the absence of risk​ differences, accepts the project with the highest NPV. The cost of capital is 17.2%.Homework For You

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a. Find the NPV for each project. Are the projects​ acceptable?

b. Find the breakeven cash inflow for each project.

c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two​ projects, as shown in the table. What is the probability that each project will achieve the breakeven cash inflow found in part ​(b​)​?

Probability of achieving cash inflow in given range
Range of cash inflow​ ($ millions) Standard Plant Custom Plant
​$0 to​ $5 0% 5%
​$5 to​ $8 10 10
​$8 to​ $11 60 15
​$11 to​ $14 25 25
​$14 to​ $17 5 20
​$17 to​ $20 0 15
Above​ $20 0 10

d. Which project is more​ risky? Which project has the potentially higher​ NPV? Discuss the​ risk-return trade-offs of the two projects.

e. If the firm wished to minimize losses​ (that is, NPV < $0​), which project would you​ recommend? Which would you recommend if the goal was achieving a higher​ NPV?Get Finance homework help today

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