Question
Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 220,000 BGs
Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 220,000 BGs per year will require a $24.5 million immediate capital expenditure. Production costs are estimated at $79 per BG. The BG marketing manager is confident that all 220,000 units can be sold for $114 per unit (in real terms) until the patent runs out five years hence. After that the marketing manager hasnt a clue about what the selling price will be. Assume the real cost of capital is 12%. 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, in year 6. | |
If your company invests immediately, full production begins after 12 months, that is, in year 1. | |
There are no taxes. | |
BG production facilities last 12 years. They have no salvage value at the end of their useful life. |
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