1.Notwithstanding the answers you gave in the prior 3 questions, assume the annual amounts for all years are:

Year 0-6.5 million

Year 12.54 million

Year 22.96 million

Year 32.67 million

Year 42.85 million

Calculate the NPV for buying the patent.

1. Give the answer as a number of $ million (round to two decimal places).

2.Your company has an opportunity to purchase a patent that will expire 4 years in the future. The price would be $5.2 million.

Buying the patent would enable you to produce a product at the following cost structure:

Variable cost / unit10.77

Fixed cost / year3209957

You would charge a price of $40 per unit. Demand for the product would grow over time:

Year 1120,000 units

Year 2140,000 units

Year 3160,000 units

Year 4180,000 units

If you buy the patent you will need to spend $100,000 immediately to reconfigure your factory. In addition, using the factory to make the patented product will prevent you from making other things in years 1 to 4. The opportunity cost of that lost production would be $200,000 per year.

After year 4 the patent expires and you anticipate low cost competitors will enter the market and drive prices down. As a result, whether you buy the patent or not should not depend on any expected profits post-year 4.

Note that the indicated fixed costs listed above include amortization on the patent. Amortization would be 25% of the cost of the patent each year. (I.e. straight line over the 4 year useful life.)

The discount rate is 6.6%.

(1)Calculate the appropriate amount to include in an NPV calculation for year 0. (Not the present value, but the amount that would be present valued.) In other words, exclude any effects for other years.

Give the answer as a number of $ million (round to 2 decimal places). So e.g., 6,444,265 should be written as 6.44

(2)Calculate the appropriate amount to include in an NPV calculation for year 1. (Not the present value, but the amount that would be present valued.) In other words, exclude any effects for other years.

Give the answer as a number of $ million (round to 2 decimal places). So e.g., 6,444,265 should be written as 6.44.

(3)Calculate the appropriate amount to include in an NPV calculation for year 2. (Not the present value, but the amount that would be present valued.) In other words, exclude any effects for other years.

Give the answer as a number of $ million (round to 2 decimal places). So e.g., 6,444,265 should be written as 6.44.