Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 235,000 BGs per year will require a $24.2 million immediate capital expenditure. Production costs are estimated at $82 per BG. The BG marketing manager is confident that all 235,000 units can be sold for $117 per unit (in real terms) until the patent runs out five years hence. After that, the marketing manager hasn’t a clue about what the selling price will be. Assume the real cost of capital is 13%. 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.Competitors know the technology and can enter as soon as the patent expires, that is, they can construct new plants in year 5 and start selling BGs in year 6.If your company invests immediately, full production begins after 12 months, that is, in year 1. (Assume it takes all firms one year to achieve full production.)There are no taxes.BG production facilities last 12 years. They have no salvage value at the end of their useful life. What is the NPV of the BG project?

NPV (Net present value) is calculated by deducting initial investment from present value of cash…

Answered: Thanks to acquisition of a key patent,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 235,000 BGs per year will require a $24.2 million immediate capital expenditure. Production costs are estimated at $82 per BG. The BG marketing manager is confident that all 235,000 units can be sold for $117 per unit (in real terms) until the patent runs out five years hence. After that, the marketing manager hasn’t a clue about what the selling price will be. Assume the real cost of capital is 13%. 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.
Competitors know the technology and can enter as soon as the patent expires, that is, they can construct new plants in year 5 and start selling BGs in year 6.
If your company invests immediately, full production begins after 12 months, that is, in year 1. (Assume it takes all firms one year to achieve full production.)
There are no taxes.
BG production facilities last 12 years. They have no salvage value at the end of their useful life.

What is the NPV of the BG project?

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