Reference no: EM133003557

A state-of-the-art automobile assembly plant designed to produce a new line of Harley, called the V-Rod, will cost $200 million to build. If V-Rod is successful, the new plant will generate a constant stream of revenues in the amount of $500 million per annum. However, if V-Rod is a bust the anticipated stream of revenues will be in the amount of $200 million per annum. Financial analyst's assessment reveals a 40% chance of success and a 60% chance of failure. Costs of goods are approximately 80% of revenues and are expected to be constant through the years. The level of working capital is 5% of the next year's sales revenues. The risk-adjusted cost of capital for this particular project is 20% while the opportunity cost of capital for the company is only 9%. The marginal tax rate is 40% for the company.

You may assume that this project has a twenty-year term and that the firm uses a straight-line depreciation method with a zero salvage value.

Problem 1: Determine whether the firm should undertake this investment opportunity. Take your pick of the best investment criterion to use. You need to explain why you use that criterion and solve the problem using only that criterion.