1. Valuation Case FEV is an automobile company with current automobile sales accounting for 2.62% of the worldwide market. FEV has a potential breakthrough technology idea around Hydrogen Cars. This idea will take 5 years to develop at an initial R&D of $100 million. The probability of this being a technical success is 40%. There is no required approval stage. With this idea, FEV has a 50% chance of capturing 20% of the worldwide market for automobiles and a 50% chance of capturing 10% of the worldwide market. The cost of sales will be 40%, marketing 20%, general expenses 10%, and a 15% increment in capital will be required upon commercialization. The commercialization period is 7 years. The tax rate is 33%, beta is 1. Bond rates are 1%, and the market risk premium is 5%. The decision tree for this valuation is as follows: 7 years Commercialization Develop 5 yrs 60% 40% Abandon High State 50% Low State 50%