PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 11, Problem 10PS
Economic rents Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 200,000 BGs per year will require a $25 million immediate capital expenditure. Production costs are estimated at $65 per BG. The BG marketing manager is confident that all 200,000 units can be sold for $100 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. What is the
- 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.
- There are no taxes.
- BG production facilities last 12 years. They have no salvage value at the end of their useful life.
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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 245,000 BGs per year will require a $25.9 million immediate capital expenditure. Production costs are estimated at $74 per BG. The BG marketing manager is confident that all 245,000 units can be sold for $109 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 10%. 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…
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 $25.7 million immediate capital expenditure. Production costs are estimated at $72 per BG. The BG marketing manager is confident that all 235,000 units can be sold for $107 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 11%. 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…
Chapter 11 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 11 - Economic rents True or false? a. A firm that earns...Ch. 11 - Prob. 2PSCh. 11 - Prob. 3PSCh. 11 - Prob. 4PSCh. 11 - Prob. 5PSCh. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Market prices Suppose the current price of gold is...Ch. 11 - Prob. 9PSCh. 11 - Economic rents Thanks to acquisition of a key...
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