Problem
Monrovia is considering investing in R&D to improve its product and offer more features. The cost of innovation is $ 500,000. The current per unit selling price of the product in the market fluctuates between $ 110 and $ 130. The per unit variable cost currently stands at $ 100. Over the last several years variable costs have been steadily increasing at the rate of 2% per year. The total market size for the products sold is 5,000,000 units. The market on average has registered growth between 2% and 5% over the last several years. Their market share has been steady at around 5%. Monrovia also operates in an industry where the buyers are quite powerful. The estimated price elasticity of demand is that a 1.1 X times price increase leads to a 30% decline in quantity demanded. Further assume that the cost of capital for the firm is 7%. What is the projected cost of this investment?