After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It
Question:
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 $8.65 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 4.3 million packages a year. Cash costs of production in the first year are expected to be $4.55 per package in real terms for the headache-only brand. Production costs are expected to be $5.10 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 $17 million. That equipment would last three years and have no resale value. The machinery required to produce the broader remedy would cost $28 million and last three years. The firm expects that equipment to have a $800,000resale value (in real terms) at the end of Year 3.
The firmuses straight-line depreciation and hasa tax rate of 24 percent. The appropriate real discount rate is 9 percent.
a.Calculate the NPV for headache pain reliever only.(Do not round intermediate calculations and enter your answer in dollars, not millions of dollars,rounded to 2 decimal places, e.g., 1,234,567.89.)
b.Calculate the NPV for headache and arthritis pain reliever.(Do not round intermediate calculations and enter your answer in dollars, not millions of dollars,rounded to 2 decimal places, e.g., 1,234,567.89.)