After extensive medical and marketing research, Pill Ltd. believes it can penetrate the pain reliever market. It can follow one of two strategies. The first strategy is to manufacture a medication aimed at relieving headache pain. The second strategy is to make a pill designed to relieve headache and arthritis pain. Both products would be introduced at a price of $8.35 per package in real terms. The headache and arthritis remedy would probably sell 4.5 million packages per year, while the headache-only medication is projected to sell 3 million packages per year. Cash costs of production in the first year are expected to be $4.10 per package in real terms for the headache-only brand. Production costs are expected to be $4.65 in real terms for the headache and arthritis pill. All prices and costs are expected to rise at the general inflation rate of 3 percent. Either strategy would require further investment in plant. The headache-only pill could be produced using equipment that would cost $23 million, last three years, and have no resale value. The machinery required to produce the headache and arthritis remedy would cost $32 million and last three years. The firm would be able to sell it for $1 million (in real terms). Suppose that for both projects the firm will use a CCA rate of 25 percent. Assume the company has other assets and UCC is always positive in the asset class. The firm faces a corporate tax rate of 34 percent. Management believes the appropriate real discount rate is 7 percent. Which pain reliever should Pill Ltd. produce?
After extensive medical and marketing research, Pill Ltd. believes it can penetrate the pain reliever market. It can follow one of two strategies. The first strategy is to manufacture a medication aimed at relieving headache pain. The second strategy is to make a pill designed to relieve headache and arthritis pain. Both products would be introduced at a price of $8.35 per package in real terms. The headache and arthritis remedy would probably sell 4.5 million packages per year, while the headache-only medication is projected to sell 3 million packages per year. Cash costs of production in the first year are expected to be $4.10 per package in real terms for the headache-only brand. Production costs are expected to be $4.65 in real terms for the headache and arthritis pill. All prices and costs are expected to rise at the general inflation rate of 3 percent. Either strategy would require further investment in plant. The headache-only pill could be produced using equipment that would cost $23 million, last three years, and have no resale value. The machinery required to produce the headache and arthritis remedy would cost $32 million and last three years. The firm would be able to sell it for $1 million (in real terms). Suppose that for both projects the firm will use a CCA rate of 25 percent. Assume the company has other assets and UCC is always positive in the asset class. The firm faces a corporate tax rate of 34 percent. Management believes the appropriate real discount rate is 7 percent. Which pain reliever should Pill Ltd. produce?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:After extensive medical and marketing research, Pill Ltd. believes it can penetrate the pain reliever market. It can follow one
of two strategies. The first strategy is to manufacture a medication aimed at relieving headache pain. The second strategy is to
make a pill designed to relieve headache and arthritis pain. Both products would be introduced at a price of $8.35 per
package in real terms. The headache and arthritis remedy would probably sell 4.5 million packages per year, while the
headache-only medication is projected to sell 3 million packages per year. Cash costs of production in the first year are
expected to be $4.10 per package in real terms for the headache-only brand. Production costs are expected to be $4.65 in real
terms for the headache and arthritis pill. All prices and costs are expected to rise at the general inflation rate of 3 percent.
Either strategy would require further investment in plant. The headache-only pill could be produced using equipment that
would cost $23 million, last three years, and have no resale value. The machinery required to produce the headache and
arthritis remedy would cost $32 million and last three years. The firm would be able to sell it for $1 million (in real
terms). Suppose that for both projects the firm will use a CCA rate of 25 percent. Assume the company has other assets and
UCC is always positive in the asset class.
The firm faces a corporate tax rate of 34 percent. Management believes the appropriate real discount rate is 7 percent. Which
pain reliever should Pill Ltd. produce?
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