Reference no: EM133121919

A leading manufacturing company in the industrial space is considering a new service of AI Predictive Maintenance. The company will provide this service by selling licences. The firm has already spent $15 million in market research to estimate potential revenues and costs, and another $10 million to study the viability and the cost of developing the technology. Market research suggests that the total addressable market next year (year 1) is 200 licenses and that the firm should capture 25% of the market, thus selling 50 licences. The number of licences sold will grow by 20% between year 1 and year 2 and 20% again between year 2 and year 3. In year 4 the market is expected to reach maturity, and the growth in the number of licenses will slow down to 2% from then onwards. The annual price of each license is expected to be $1.5 million next year and will increase 1% per year after that. The costs to operate this business are expected to be equal to 65% of the sales. To develop this new service, the company would need to invest $300 million in R&D this year (year 0). There is no depreciation and the project will require $5 million in working capital from the first year onwards. The tax rate is 35% and the project's cost of capital is 10%. Note: Report your results in millions of dollars (do not enter the $ sign, use a three-digit precision in your own computations, and a two-digit precision in the result).

• What is the expected revenue in year 2? Note: Report your results in millions of dollars
• What is the expected EBITDA in year 2 ?
• What is the expected change in WC in year 2
• What is the expected cash flow in year 2
• What is the expected NPV of the project?
• Should the company launch the new service?