9. Skyjets, an aircraft manufacturing company, invested £200 million five years ago to build a factory for producing wing parts. The factory is now ready. Over the next twenty years that it will be operational, it is expected to generate £200 million in revenues and £25 million in operating costs (including depreciation for the assets, the cost of financing the project, etc). However, the board of directors of the company is considering whether it is worth investing in a new factory, which will adopt the latest manufacturing technology. The new factory would yield £400 million in revenues, £50 million in operating costs, and it would cost £200 million to build. If the old factory is abandoned it would have £0 value to the company. a. Calculate the accounting profit of the new factory. b. Calculate the economic profit of the new factory. Should Skyjets go ahead with the new project and why/why not? c. Suppose that the company decides to go ahead with the construction of the new factory. After the construction starts, the construction company claims that building costs have increased from £200 million to £300 million. Assuming that the old factory is already scrapped at this stage, should the project still go ahead? What could the company have done to protect itself from this hold-up?
9. Skyjets, an aircraft manufacturing company, invested £200 million five years ago to build a factory for producing wing parts. The factory is now ready. Over the next twenty years that it will be operational, it is expected to generate £200 million in revenues and £25 million in operating costs (including depreciation for the assets, the cost of financing the project, etc). However, the board of directors of the company is considering whether it is worth investing in a new factory, which will adopt the latest manufacturing technology. The new factory would yield £400 million in revenues, £50 million in operating costs, and it would cost £200 million to build. If the old factory is abandoned it would have £0 value to the company. a. Calculate the accounting profit of the new factory. b. Calculate the economic profit of the new factory. Should Skyjets go ahead with the new project and why/why not? c. Suppose that the company decides to go ahead with the construction of the new factory. After the construction starts, the construction company claims that building costs have increased from £200 million to £300 million. Assuming that the old factory is already scrapped at this stage, should the project still go ahead? What could the company have done to protect itself from this hold-up?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...
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Transcribed Image Text:9. Skyjets, an aircraft manufacturing company, invested £200 million five years ago to build a
factory for producing wing parts. The factory is now ready. Over the next twenty years that
it will be operational, it is expected to generate £200 million in revenues and £25 million in
operating costs (including depreciation for the assets, the cost of financing the project, etc).
However, the board of directors of the company is considering whether it is worth
investing in a new factory, which will adopt the latest manufacturing technology. The new
factory would yield £400 million in revenues, £50 million in operating costs, and it would
cost £200 million to build. If the old factory is abandoned it would have £0 value to the
company.
a. Calculate the accounting profit of the new factory.
b. Calculate the economic profit of the new factory. Should Skyjets go ahead with the new
project and why/why not?
c. Suppose that the company decides to go ahead with the construction of the new factory.
After the construction starts, the construction company claims that building costs have
increased from £200 million to £300 million. Assuming that the old factory is already
scrapped at this stage, should the project still go ahead? What could the company have
done to protect itself from this hold-up?
10. Beta, an accounting firm, competes against Kyklos Associates, another accounting firm in
the market for consultancy services to commercial firms. Beta's demand for its services is a
function of its own pricing (Pg), the pricing of Kyklos (px) and the average profitability of
its customers (R). This demand function is given mathematically below:
DB (PB. PK, R) = 9:
* VR
The total cost of Beta as a function of the aggregate number of services (q) it provides is:
TCB (q) = 5,000,000 + 300 * q
a. Suppose that p3 = Px = 10,000 and R = 100,000,000. Compute Beta's demand for its
services.
b. Estimate the elasticity of demand with respect to its price for the parameter values of
part (a) above.
c. Due to the pandemic, the general profitability in the market has dropped to R =
40,960,000 and Kyklos has responded by slashing its price to px = 8,000. Find the
combination of price and quantity that maximizes Beta's profit in this case.
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