3. (15 points) Your firm is considering building a shipping facility in Hampton Roads. The facility will either be high-

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3 15 Points Your Firm Is Considering Building A Shipping Facility In Hampton Roads The Facility Will Either Be High 1 (27.57 KiB) Viewed 28 times

3. (15 points) Your firm is considering building a shipping facility in Hampton Roads. The facility will either be high-tech automated with initial cost of $40 million or low-tech manual initial cost of $20 million. For the first 5 years, demand will be normal and generate $10 million of free cashflow. Afterwards, demand will be high or low with equal 50/50 probability. If demand is low, FCFs will be $5 million per year for both facility types. If demand is high, the automated facility can be scaled up (at no cost) to generate $20 million per year. The low-tech manual facility cannot be scaled up and will continue to generate $10 million per year if demand is high. Is it worth purchasing the "option" to scale up? Assume WACC is 12%.