Your R&D group has developed and tested a computer software package that assists

ID: 2743711 • Letter: Y

Question

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

Choices are

$1,458,998

$1,116,509

$2,047,734

$2,346,98

$1,458,998

$1,116,509

$2,047,734

$2,346,98

Explanation / Answer

Here NPV of the project should be calculated.

The NPV table is as below:

Year

Cash flow (C)

15% discount factors (f)

C × f

1,000,000

0.8696

869,600

750,000

0.7561

567,075

562,500

0.6575

369,843.75

421,875

0.5718

241,215.25

NPV

2,047,734

Answer: The minimum price for selling would be $2,047,734