Thanks to acquisition of a key patent, your company now has exclusive production
ID: 2633332 • Letter: T
Question
Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 240,000 BGs per year will require a $25.8 million immediate capital expenditure. Production costs are estimated at $73 per BG. The BG marketing manager is confident that all 240,000 units can be sold for $108 per unit (in real terms) until the patent runs out five years hence. After that the marketing manager hasnt a clue about what the selling price will be. Assume the real cost of capital is 12%. To keep things simple, also make the following assumptions:
The technology for making BGs will not change. Capital and production costs will stay the same in real terms.
What is the NPV of the BG project? (Do not round intermediate calculations. Enter your answer to the nearest whole dollar.)
The technology for making BGs will not change. Capital and production costs will stay the same in real terms.
Competitors know the technology and can enter as soon as the patent expires, that is, in year 6. If your company invests immediately, full production begins after 12 months, that is, in year 1. There are no taxes. BG production facilities last 12 years. They have no salvage value at the end of their useful life.Explanation / Answer
Investment into the project capital expenditure $25,800,000 Production costs 87,600,000 113,400,000 Year cash flows PV factor @12% Present value 1 25,920,000 0.893 23146560 2 25,920,000 0.797 20658240 3 25,920,000 0.712 18455040 4 25,920,000 0.636 16485120 5 25,920,000 0.567 14696640 93441600 NPV = cash outflows + cash inflows NPV = -19,958,400
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