A plant to make DVD player cost \$40 million Answer

Problem 3 A plant to make DVD player cost \$40 million, and has an annual capacity of 100,000 units, and has an indefinite physical life. The variable production cost per unit is \$20 and is not expected to change, if the cost of capital is 10% what is the price of a DVD player. Suggested solution: NPV = Costs + [(p- costs per unit) x annual capacity] = 0 cost of capital Now solve for “P”.

Problem 4 Company A is faced with the following capital budgeting decision. Its display freezer must be repaired. The cost
of the repair will be \$1000, and the system will be usable for another 5 years. Alternatively, the firm could purchase a new freezer for \$5000 and sell the old one for \$500. The new freezer has more display and will increase the profits attributable to frozen foods by 30 % Profits for that department were \$5,000 in the last fiscal year. The company cost of capital is 9%. Ignoring taxes what should the firm do? Suggested solution guide