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P12–1 Recognizing risk Caradine Corp., a media services firm with
net earnings of $3,200,000 in the last year, is considering the
following projects. LG 1 The media services business is cyclical and
highly competitive. The board of directors has asked you, as chief
financial officer, to do the following: a.Evaluate the risk of each
proposed project and rank it ―low,‖ ―medium,‖ or ―high.‖ b.Comment
on why you chose each ranking. P12–3 Breakeven cash inflows and
risk Blair Gasses and Chemicals is a supplier of highly purified gases
to semiconductor manufacturers. A large chip producer has asked
Blair to build a new gas production facility close to an existing
semiconductor plant. Once the new gas plant is in place, Blair will be
the exclusive supplier for that semiconductor fabrication plant for the
subsequent 5 years. Blair is considering one of two plant designs. The
first is Blair’s ―standard‖ plant, which will cost $30 million to build.
The second is for a ―custom‖ plant, which will cost $40 million to
build. The custom plant will allow Blair to produce the highly
specialized gases that are required for an emerging semiconductor
manufacturing process. Blair estimates that its client will order $10
million of product per year if the traditional plant is constructed, but if
the customized design is put in place, Blair expects to sell $15 million
worth of product annually to its client. Blair 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 12%.
LG 2 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 following table. What is the
probability that each project will achieve at least the breakeven cash
inflow found in part b? 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