Expected value analysis: Home Garden Inc. Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to service its east coast stores based on the following estimates:

Construction cost of warehouse $20,000,000 to $25,000,000
Residual value $3,000,000
Useful life 25 years
Estimated annual net cost savings $2,500,000 to $4,000,000
Assume Home Garden Inc. assigns the following probabilities to the estimated construction cost of the warehouse and annual net cash flows:

Construction
Cost Probability
of Occurring Annual
Net
Cash Flow Probability
of Occurring
$20,000,000 0.55 $4,000,000 0.50
23,000,000 0.30 3,000,000 0.36
25,000,000 0.15 2,500,000 0.14
Total 1.00 Total 1.00
a. Compute the expected value of the construction cost.

Construction
Cost Expected
Value
$20,000,000 $fill in the blank 1
11,000,000
23,000,000 fill in the blank 2
6,900,000
25,000,000 fill in the blank 3
3,750,000
Total $fill in the blank 4
21,650,000
b. Compute the expected value of the annual net cash flows.

Annual Net
Cash Flow Expected
Value
$4,000,000 $fill in the blank 5
2,000,000
3,000,000 fill in the blank 6
1,080,000
2,500,000 fill in the blank 7
350,000
Total $fill in the blank 8
3,430,000
c. Determine the expected net present value of building the distribution warehouse, assuming a desired rate of return of 14% and using the expected values computed in parts (a) and (b). Use the Present Value of $1 at Compound Interest and Present Value of Ordinary Annuity. Round to the nearest dollar.

Net present value $fill in the blank 9
18,991,162