Business of designing and manufacturing running shoes

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Reference no: EM13767571

Super Tennis Co is in the business of designing and manufacturing running shoes for long distance runners. They are considering a $500 million upgrade to their production line for the iPhone/iPad/ iWatch connected shoe that has Bluetooth connectivity. The potential cash flow is estimated at net revenues of $460 million per year for four years. Recently, they were advised of potential patent infringement and to eliminate this problem they are considering buying a license. YezzCo will sell a license that is good for four years of exclusive use of the patent and associated intellectual property. Super Tennis Co uses a corporate MARR of 14% and their risk-free alternatives are 6%. The VP of Engineering at Super Tennis Co estimates market volatility in demand is 40%. The VP of Marketing estimates market volatility in demand at 35%.

1. Since the VPs trust you, they asked you to figure out the most they should pay for a license from YezzCo.

2. Super Tennis Co is known to be liberal in ignoring intellectual property claims. Imagine they just go ahead with the project as stated above. (In other words, they decide not to pay for the license.) YezzCo aggressively protects their property and sues immediately. Sometime in year 3, (from the start of the effort) a court decision requires Super Tennis Co to reimburse YezzCo $375 million. They pay at the end of year 4. How does this strategy work for them? Are they better off licensing or being aggressive?

Reference no: EM13767571

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