Question
The manufacture of disposable gloves is a competitive industry with no competitive advantage. The manufacturing facilities have an annual output of 50 billion pieces of
The manufacture of disposable gloves is a competitive industry with no competitive advantage. The manufacturing facilities have an annual output of 50 billion pieces of gloves. Operating costs are $0.10 per piece. A 50 billion-piece capacity plant costs $15 billion to build and have an indefinite life, with no salvage value. The cost of capital is 10% (assume no taxes). Your company has just discovered a new process that lowers the operating cost per piece to $0.05. Assuming that the competition will catch up with the manufacturer by year 3, so that it can earn only its cost of capital on any investments made in year 3 and subsequent years, what is the net present value (NPV) of building a new plant with new technology?
a.
$3.34 billion
b.
$4.34 billion
c.
$-2.57 billion
d.
$50 billion
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