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Tech Industries, a contract manufacturer of circuit boards, is evaluating an investment in a new production line to handle the growing demand from its customers, who produce consumer electronic products. Based on reasonable growth assumptions, the NPV of the new production line was found to be -$2.3 million. Management feels obligated to therefore reject the project. It recognizes that the production line would provide a high degree of output flexibility because it could be repurposed easily and inexpensively to produce circuit boards for numerous other applications. The firm’s project analyst estimated the value of this output flexibility option to be $3.3 million.
a. Based on the information provided, what is the true value of Tech Industries’ proposed new production line?
b. What recommendation would you give Tech Industries regarding the proposed new production line? Explain.
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