Question
Your firm just acquired a patent with 5 years remaining that grants exclusive production rights for Bounders, a new type of shoe. Production facilities for
Your firm just acquired a patent with 5 years remaining that grants exclusive production rights for Bounders, a new type of shoe. Production facilities for 200,000 Bounders per year will require an immediate capital investment of $25 million, and full production can begin 1 year from today. Production costs are $65/unit and the marketing team is confident all 200,000 units can be sold at $100 each (in real terms). Once the patent protection expires, the marketing team has no idea what the price will be. The real cost of capital for this project is 9%. Assuming capital and production costs will remain constant, in real terms, there are no taxes, and that the production facility has a 12-year life with no salvage value, should your firm make this investment? Provide a carefully documented economic analysis to justify your opinion. Note, competitors know this technology and can enter the market as soon as the patent expires. That is, they can construct facilities in year 5 and start selling similar products in year 6.
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