project analysis and inflation

Project Description:

case study p 204 – problem 37
project analysis and inflation:

after extensive medical and marketing research, pill, inc., believes it can penetrate the pain reliever market. it is considering two alternative products. the first is a medication for headache pain. the second is a pill for headache and arthritis pain. both products would be introduced at a price of $8.35 per package in real terms. the headache-only medication is projected to sell 3 million packages a year, whereas the headache and arthritis remedy would sell 4.5 million packages a 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 product requires further investment. the headache only pill could be produced using equipment costing $23million. that equipment would last three years and have no resale value. the machinery required to produce the broader remedy would cost $32million and last three years. the firm expects that equipment to have a $1million resale value (in real terms) at the end of year 3.
pill, inc., uses straight-line depreciation. the firm faces a corporate tax rate of 34 percent and believes that the appropriate real discount rate is 7 percent. which pain reliever should the firm produce?
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Project Stats:

Price Type: Fixed

Project Budget: $10 to $20
Total Proposals: 4
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