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PROBLEM DeltaCom Inc. has a monopoly on two product lines, regular long distance service and Watts service. The annual demand function for regular service is
PROBLEM DeltaCom Inc. has a monopoly on two product lines, regular long distance service and Watts service. The annual demand function for regular service is given by PR = % and for Watts service by PR 2 92,300 denotes quantity of service units and p rice per unit. Both product lines have a per unit investment cost of $5, and the variable cost per unit for both product lines is $5. Currently, demand and capacity is at 93 = 300 and qw = 400. Moreover, the two services are substitutes. In particular, a one unit increase in the demand for regular is offset by a 2 unit decrease in the demand for Watts (i.e., 2qR + qw = 1000). Both product lines have indenite operating lives. 4 HINTS: (1) GR = 300 Aqw; (2) qW = 400+ Aqw; (3) the maximum amount by which Watts can be expanded is 600 units; (4) . Here, q dNPl/(Aqw) = _ 17. 5 + (15000) quw ,/(400.0 + Aqw) (1) [5] DeltaCom is considering an expansion of their Watts service by 100 units. If the corporate tax rate is zero and the opportunity cost of capital is 20% for both services, what would be the NPV of such an expansion? (a) 8 6786.80. (b) $ 2395.85. (c)* $1791.00. ((1) $42,604.14
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