The Manufacture of Herbal Health Tonic Is a Competitive Industry

question 53

Multiple Choice

The manufacture of herbal health tonic is a competitive industry. The manufacturing facilities have an annual output of 100,000 gallons. Operating costs are $2 per gallon. A 100,000-gallon capacity plant costs $500,000 to build and has an indefinite life, with no salvage value. The cost of capital is 20 percent (assume no taxes) . Your company has discovered a new process that lowers the operating cost per gallon to $1.00. Assuming that the competition will catch up in five years and the market demand is sufficiently high, what is the net present value of building a new plant with new technology?

• A)+$500,000
• B)+$210,648
• C)+$299,061
• D)−$220,000

---

Definitions:

Financial Intermediaries

Institutions such as banks, mortgage companies, and finance companies, that serve as go-betweens, borrowing from people who have saved to make loans to others.

Capital

Wealth in the form of money or assets, invested in order to start a business or invest in order to generate more wealth.

Real GDP

Gross domestic product adjusted for changes in the price level, providing a more accurate picture of an economy's size and growth.

Consumption

the process by which goods and services are used up by individuals or groups, typically considered the end-use in economic production cycles.