A company is considering investing 1.2M in a facility to manufacture a new product. The product will
have a five-year life, after which the facility will be shut down. A pro forma cash flow sheet for this
project (at 10% discount), with forecasted production levels, unit prices, and production costs, is shown
below:
What is the resulting NPV of the project at 12% discount?
Answer:
A farmer in Trinidad, Benguet must decide whether to take protective action to limit damage to his
lettuce crop in the event that the overnight temperature falls to a level well below freezing. If the
temperature drops too low he runs the risk of losing his entire crop, valued at 375,000. Based on the
PAG-ASA forecast, the probability of such a temperature drop is 60%. He can insulate his crop by
spraying water on all the trees, which will cost 100,000. This action might succeed in protecting the
crop, with the following possible outcomes:
Probability
Damage
0.30
0
0.15
25,000
0.10
50,000
0.15
75,000
0.30
100,000
How much would it optimally cost the farmer if he insulates the plants?
Answer: 150,000
A preventive maintenance company's oil-change facility serves customers that enter at a rate of 10 per
hour. There are five servers available to perform oil changes for entering customers. Customers wait in a
single line and enter the facility, in first-come-first-serve fashion, to the first of the five servers who is
available. Each server can change the oil of one customer's car every 30 minutes on average.
How many of the servers are busy on average?