Suppose we can create two products a and b a and b are


Suppose we can create two products: A and B; A and B are mutually exclusive to each other. The price of both products is $4 in real terms. The Sales Volume for product A is 5 million units yearly, and for product B is 10 million yearly. In real terms per unit, for product A would be $1.5 and for product B would be $1.70. Assume inflation rates here is 5%. Further, suppose product A need investments of $10.2 million and product B needs investment of $ 12 million. Both products A and B are depreciated straight-line down to zero in 3 years,the product B line will have a $ 1000 in real terms after year 3. The real discount rate is 13% and the corporate tax rate is 34%.

Question

1) Which product is financially preferable? Shall calculation to support.

2) Please give a case-related example of both sunk and opportunity costs.

3) When should company-specific risks not to be reflected in the discount rate applied.

4) Please give three relevant examples of real options that can be applicable here.

Request for Solution File

Ask an Expert for Answer!!
Financial Management: Suppose we can create two products a and b a and b are
Reference No:- TGS02159275

Expected delivery within 24 Hours