Project #157043 - Financal Management

Business Tutors

Subject Business
Due By (Pacific Time) 11/29/2016 08:00 pm

 

Your firm has developed what you think is an innovative, possibly game-changing technological breakthrough.  The intention is to gain a patent the innovation and then generate financial benefits.  The success of the intended course of action will depend on whether the patent is granted.

 

You have done an extensive cash-flow analysis of this project, and you have concluded that the E(PV) of cash flows from the project is $120m if the development process starts today and the patent is granted.  If the development process starts today and the patent is not granted, the E(PV) of cash flows is $-30m.  The present value of the innovation’s development cost, spread over 2 years, is $45m if the development process is initiated immediately.

 

The CEO (your future job) has presented you with the following question:  should we spend the $45m (again, the present value) over the next 2 years, or should we wait until we know the outcome of the patent process before deciding on proceeding?

 

The patent process, if you start today, is estimated to require 2 years for a final decision.  The present value of the total cost of obtaining the patent is estimated to be $.1m ($100K).  The two possible outcomes of the patent process are a granted patent, or a declined application.

 

You did some research, and you have estimated the present value of waiting 2 years to initiate development to be $55m.  The development process will require 2 years in either scenario.

 

What is your recommendation?  Please be very, very specific.  You should also explore creative alternatives.

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