Question
Assume the demand for the drug Wozac during the current year is 50,000, and assume demand will grow at 5% a year. The company wants
Assume the demand for the drug Wozac during the current year is 50,000, and assume demand will grow at 5% a year. The company wants to build a new plant to produce the drug and wondering how large a plant to build. If you build a plant that can produce x units of Wozac per year, it will cost $6x. Note that this is the fixed cost of building the plant. It costs $0.40 per year to operate a unit of capacity. Each unit of Wozac produced incurs a variable production cost of $0.20. Each unit of Wozac is sold for $3. Assume that the price, variable cost, and cost for capacity do not change for the next ten years. Determine how large a Wozac plant to build to maximize the NPV of the profit over the next ten years. Assume a discount rate of 10%.
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