Reference no: EM132020199

Blue Ridge Aluminum is evaluating a proposal to invest $300 million to expand production capacity at their Blacksburg, Virginia aluminum mill. If the firm invests to expand capacity immediately at date 0 the aluminum mill will generate incremental after-tax cash inflows of $25 million at the end of the year, at date 1. The end-of-the-year continuation value of the proposed expansion will be $400 million if the economy is experiencing strong economic growth at date 1, but only $250 million if the economy deteriorates. If Blue Ridge waits until the end of the year (date 1) to invest in the proposed expansion, the incremental date 1 after- tax cash flow of $25 million will be lost. However, the date 1 continuation value of the expansion will be known with certainty. The cost of expansion is expected to remain constant. Assuming that the risk-free interest rate is 3 percent and the risk-adjusted probability that the economy will have strong economic growth is 0.40, determine whether Blue Ridge should invest today, or wait until date 1 to re-assess the desirability of the expansion.