Question 2

(a) Why are economic rents important to managers?

(b) What may hamper the firm's chances of earning economic rents?

('c) You are considering investing in a glove manufacturing plant for which you need to immediately pay RM10 million. You expect to produce and sell 10,000 gloves per year. Production commences after 12 months, i.e, at the end of year 1 (which is also the beginning of Year 2). You expect production cost to be RM50 per glove. Selling price is estimated at RM100 per glove for the first three years of sales. You are not sure about the sales price after Year 3 because your exclusive patent right expired then. The plant facilities last for 8 years. Cost of capital is 8%.

Compute the following:

(i) The glove's sales price after Year 3.

(ii) This project's NPV.