After extensive medical and marketing research, Pill, Inc., believes it can penetrate the

pain reliever market. It is considering two alternative products. The first is a medication

for headache pain. The second is a pill for headache and arthritis pain. Both products

would be introduced at a price of $9.10 per package in real terms. The headac

he

-

only

medication is projected to sell 3 million packages a year, whereas the headache and

arthritis remedy would sell 4.2 million packages a year. Cash c

osts of production

are

expected to be $5.00 per package in real terms for the headache

-

only brand.

Pr

oduction costs are expected to be $5.55 in real terms

per package

for the headache

and arthritis pill.

The inflation rate in the economy is 3% per year.

Either product requires further investment. The headache

-

only pill could be produced

using equipment co

sting $20 million. That equipment would last three years and have

no resale value. The machinery required to produce the broader remedy would cost

$29 million and last three years. The firm expects that equipment to have a $1 million

resale value (in real

terms) at the end of Year 3.

Pill, Inc., uses straight

-

line depreciation.

Depreciation is expressed in nominal terms

.

The firm faces a corporate tax rate of 34 percent and believes that the appropriate real

discount rate is 8 percent.

A.

Calcula

te the NPV for

the headache

-

only

pain reliever.

B.

Calculate the NPV for the headache and arthritis pain reliever.

C.

Which project should we undertake?