1. How would your answer to Problem 10 change if technological improvements reduce the cost of new BG production facilities by 3% per year? Thus a new plant built in year 1 would cost only 25 (1 − .03) =$24.25 million; a plant built in year 2 would cost $23.52 million; and so on. Assume that production costs per unit remain at $65.
2. Go to the “live” Excel spreadsheets versions of Tables 11.1–11.3 at . Reevaluate the NPV of the proposed polyzone project under each of the following assumptions. What’s the right management decision in each case?
a. Spread in year 4 holds at $1.20 per pound.
b. The U.S. chemical company can start up polyzone production at 40 million pounds in year 1 rather than year 2.
c. The U.S. company makes a technological advance that reduces its annual production costs to $25 million. Competitors’ production costs do not change.
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