E3.8 Your R&D group has developed and tested a computer software package that as

Question

E3.8

Your R&D group has developed and tested a computer software package that assists engineers to control the proper chemical mix for the various process-manufacturing industries. If you decide to market the software, your first-year operating net cash flow is estimated to be $1,000,000. Because of market competition , product life will be about 4 years, and product market share will decrease by 25% each year over the previous year's share. You are approached by a big software house which wants to purchase the right to manufacture and distribute the product. Assuming that your interest rate is 15%, for what minimum price would you be willing to sell the software?(Please show work)(Use excel if possible)

$1,458,998

$1,116,509

$2,047,734

$2,346,987

a.

$1,458,998

b.

$1,116,509

c.

$2,047,734

d.

$2,346,987

Explanation / Answer

Option (c).

Decrease of market share by 25% a year will reduce net cash flow by 25% a year ceteris paribus.

Minimum price to sell is the present worth (PW) of the cash flows.

Year Cash Flow ($) Discount factor @15% Discounted cash flow ($) (A) (B) (A) x (B) 1 10,00,000 0.8696 8,69,565 2 7,50,000 0.7561 5,67,108 3 5,62,500 0.6575 3,69,853 4 4,21,875 0.5718 2,41,208 Present worth ($) = 20,47,734

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