Reference no: EM133496354
Case: You have come up with a great idea for a new product called the Analytics Optimizer (A-Op), which is a proprietary business tool that allows companies to keep track of the length of time their employees keep their computer mice hovering over ads that pop up on their browsers. You are unsure, at the moment, of how well this product will be received. You estimate that demand for the product this year will be for 100,000 units. For the year after, you think that there is a 20% probability the product will be hugely successful, in which case you will sell 1.5 million units. Otherwise, you will only sell 150,000 units. You anticipate having a much better view of the actual demand in the second year (assume you will know it perfectly), right at the end of the first year.
Each unit retails for $100 and costs you $50 to produce. For simplicity assume that all revenues are received, and all production costs are incurred at the end of the year. In addition, for each year in which you are in operation, you need to lease sales space in downtown San Francisco in order to be close to the tech sector. All leases run for 2 years, and the total cost of these will be $12 million for the 2 years, payable upfront (immediately). The project will end after 2 years and there is no continuation value.
Finally, suppose that your cost of capital is 11%.
Question 1: You would like to sell your idea to a potential buyer. What is the maximum a potential buyer would be willing to pay?
Question 2: The property manager of the space you are using for your sales floor mentions to you an interesting fact: He says that there is a shortage of available commercial space in downtown San Francisco, so he believes that if you want to back out of the second year of your lease, he can make that happen, and in fact is willing to give you an incentive to do so. He would give you back half of the money you paid, plus 3 months' worth of rent as an incentive to you (so in other words, he would give you back 62.5% of what you originally paid). By how much does this change the maximum price at which you might be able to sell your idea? Please provide an answer in dollars, rather than in percent terms.