Reference no: EM13871599
A proposed automotive plant will produce automobiles in Brazil. The Brazil- ian currency is the real. The following facts apply:
Initial investment I0 = R100,000,000; rises by 20% each year Price of automobile P0 = P1 = R18,000 per vehicle
Cost per vehicle C1 = either = either R12,000 or R18,000 with equal probability
Production Q = 10,000 vehicles per year forever
Discount rate i = 20%
a. Suppose production costs are determined exogenously by government fiat and will be known with certainty in one year. Management must decide whether to begin production today or in one year. Calculate (1) the NPV of investing today as if it were a now-or-never alternative, (2) the NPV (at t = 0) of waiting one year before making a decision, and (3) the NPV of investing today, including all opportunity costs.
b. Suppose this investment is one of ten plants with identical characteristics that could be built. The outcome from your initial investment will provide information about the production costs that will be incurred at other sites. Calculate (1) the NPV of investing today in all ten sites as if it were a now-or-never alternative, (2) the NPV (at t = 0) of investing in one factory today and then waiting one year before making a decision on the other nine factories, and (3) the NPV of investing today, including all opportunity costs.
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