Question
The Long- Life Company has a new vaccine. The company estimates that it has a 10- year monopoly for the production of the vaccine, and
The Long- Life Company has a new vaccine. The company estimates that it has a 10- year monopoly for the production of the vaccine, and it is trying to estimate how many vaccines it should try to sell annually.
Machines to produce the new vaccine cost $70 million, have a 5- year life, straight- line depreciation, and a zero salvage value. Each machine is capable of producing 75,000 doses annually. The price per vaccine is $1500. Annual fixed costs for producing the vaccine are $50 million, and the variable costs per dose is $1,000. The companys discount rate for this type of vaccine is 15%, and its corporate tax rate is 30%. The total market for the vaccine could be as high as 1,000,000 annually. (Hint: since the machine has a 5-year life. Consider purchasing new machines at the end of year 5.
- If the annual sales are 200,000, what will be the NPV and IRR of the product over its 10- year life?
Build a data table to show the relation between annual vaccine sales and the NPV. Set up the discount rate in the column from 10% to 30% in increments of 2%. Set up the annual vaccine sales in the row from 100000 to 900000 in increments of 100000.
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