Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 11, Problem 17PS
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 205,000 BGs per year will require a $24.8 million immediate capital expenditure. Production costs are estimated at $76 per BG. The BG marketing manager is confident that all 205,000 units can be sold for $111 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 210,000 BGs per year will require a $25.2 million immediate capital expenditure. Production costs are
estimated at $67 per BG. The BG marketing manager is confident that all 210,000 units can be sold for $102 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 the acquisition of a key patent, your company now has exclusive production rights for producing a new product called BigGassers (BGs) in North America. Production facilities for 200,000 BGs per year will require a $25 million 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 the patent expires, other companies will enter the market and the price will go down. Assume that:
The real cost of capital is 9%
The technology to produce BGs will not change. Capital and production technology will stay the same in real terms.
If your company invests immediately, full production begins after 12 months.
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
There are no taxes
BG production facilities last 12 years.…
Chapter 11 Solutions
Principles of Corporate Finance
Ch. 11 - Capital budgeting process True or false? a. The...Ch. 11 - Capital budgeting process Explain how each of the...Ch. 11 - Capital budgeting process Draw up an outline or...Ch. 11 - Prob. 4PSCh. 11 - Biased forecasts Look back to the cash flows for...Ch. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Prob. 8PSCh. 11 - Market prices Suppose the current price of gold is...Ch. 11 - Prob. 10PS
Ch. 11 - Prob. 11PSCh. 11 - Prob. 12PSCh. 11 - Prob. 13PSCh. 11 - Economic rents True or false? a. A firm that earns...Ch. 11 - Prob. 16PSCh. 11 - Economic rents Thanks to acquisition of a key...Ch. 11 - Prob. 18PSCh. 11 - Prob. 19PSCh. 11 - Prob. 20PSCh. 11 - Prob. 21PSCh. 11 - Prob. 22PSCh. 11 - Economic rents Taxes are a cost, and, therefore,...Ch. 11 - Prob. 1MCCh. 11 - Libby Flannery, the regional manager of Ecsy-Cola,...
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