Reference no: EM132658796

Problem - If you don't patent the technology, you will need to lock the recipe in a safe and hope that no one ?gures out how to replicate it. This is a risky strategy, but hey, no one else has ?gured it out yet. You can produce and make a pro?t on the technology. However, your cost of production will be higher because you will have to have much more security to protect your recipe. Also, this is no longer a risk-free project so your interest rate is much higher at 9%.

It will cost you $1,000,000 today to build a manufacturing plant. Your revenue will be $5,000,000 in year 1 and revenue will increase at a rate of 7% per year until year 11. Costs will be $6,000,000 in year 1 and increase at a rate of 2% each year until year 11. At year 11, your revenue, expenses, and pro?t all stop increasing such that forever after your pro?t neither increase nor decreases. What is the NPV of this project? (All cash ?ows occur at the end of the year).

You meet a shady man in a bar that guarantees he can keep your recipe secret. You check out his anonymous references and it turns out that he really can guarantee your recipe stays secret. He is really good at keeping things secret but doesn't understand ?nance. He says all you have to do is pay him $500,000 per year for his services, but won't have to pay for the extra security. This means that your ?rst- year expenses will be $5,500,000 and increase at 2% per year. Also, your investment is risk-free now thanks to this mysterious stranger. Now what is the NPV of this project? (all cash ?ows occur at the end of the year).