A company license was generated currentlyfor a patent for "LIDAR on a chip". It is considering developing the patent into a product that can be placed into low-cost commercial UAV systems at a cost of $50 million (this development cost is expected to remain constant over time, no inflation).Once developed, the recurring implementation cost is $25/UAV (expected to remain constant).Assume that the demand for UAVs is 300,000/year (forever).Assume a 6%/year discount rate (riskless, and everything).

a) If your company goes ahead today with the development of the product based on the patent, what is the NPV? Assume that each UAV that is equipped with the new technology can be sold for a $40 premium (forever) starting one year from now - no uncertainties.

b) Now there is some uncertainty . Assume that the $40/unit premium today could be either $50 or $30 a year from now. If the development could be delayed for a year, it would become clear what the premium will be.However, suppose that the deal on the license is that your company has to develop now or their rights expire.But, the patent owner will allow them to buy an option to delay starting the patent's development for 1 year.What should your company pay for the option?