1. 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.
2. 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?
