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Problem 1 1 - 1 5 Economic rents Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (
Problem 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 BGs per year will require a $ million immediate capital expenditure. Production
costs are estimated at $ per BG The BG marketing manager is confident that all units can be sold for $ 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 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 and start selling BGs in year
If your company invests immediately, full production begins after months, that is in year Assume it takes all firms
one year to achieve full production.
There are no taxes.
BG production facilities last years. They have no salvage value at the end of their useful life.
What is the NPV of the BG project?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to decimal places.
Answer is complete but not entirely correct.
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