Assignment task: Economic rents
Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 245,000 BGs per year will require a $25.9 million immediate capital expenditure. Production costs are estimated at $74 per BG. The BG marketing manager is confident that all 245,000 units can be sold for $109 per unit (in real terms) until the patent runs out five years hence. After that, the marketing manager hasn't a clue about what the selling price will be. Assume the real cost of capital is 10%. To keep things simple, also make the following assumptions:
- The technology for making BGs will not change. Capital and production costs will stay the same in real terms.
- Competitors know the technology and can enter as soon as the patent expires, that is, they can construct new plants in year 5 and start selling BGs in year 6.
- If your company invests immediately, full production begins after 12 months, that is, in year 1. (Assume it takes all firms one year to achieve full production.)
- There are no taxes.
- BG production facilities last 12 years. They have no salvage value at the end of their useful life.
What is the NPV of the BG project?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.