Curtin University

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FINANCE

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FINANCE-8553

Britannia Company is considering opening a new production line in South England on 5,000 acres of land

purchased 10 years ago for $4 million. Opening the new production line will cost the company $100

million to purchase the necessary equipments, which will be depreciated to zero based on the straightline

purchase price in ten years.

The contract, that the company has, calls for the delivery of 500,000 units per year at a price o$86 per

unit. If the new line is opened, the increase in the production is estimated to be 620,000 units, 680,000

units, 730,000 units, 590,000 units, 520,000 units, 580,000 units, 630,000 units, 580,000 units, 530,000

units and 590,000 units respectively, over the next ten years. After satisfying the contract, the excess

production will be sold in the spot market at an average of $77 per unit. Variable costs amount to $31

per unit, and cash fixed costs are $4,100,000 per year.