The Nu-Tech Company Has a New Project Available to It

question 36

Essay

The Nu-Tech Company has a new project available to it at a cost of £6,000,000.The project that
they can sell 13,000 personal organizers at £172 in net cash flow for each of the next five years.Nu-
Tech's discount rate is 15%.What is the NPV of the investment? The executives of Nu-Tech are
concerned about the potential of future competition and a subsequent drop in sales and price.If
after two year you can dispose of the asset for £1,000,000 at what price would it make sense to
abandon the project?

---

Definitions:

Natural Monopoly

A natural monopoly occurs when a single firm can supply the entire market at a lower cost than could be achieved by multiple firms due to economies of scale.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Imperfect Competitors

Firms or entities in a market structure where they have some control over the price of their products, due to lack of perfect competition.

Natural Monopolies

Market situations where due to high fixed costs or unique resources, a single firm can supply a product or service more efficiently than any potential competitor, often resulting in regulation.