Question
ABC Corporation is deciding whether to capitalize on the Artificial Intelligence craze by purchasing a popular AI chatbot. ABC Corporation could buy the chatbot for
ABC Corporation is deciding whether to capitalize on the Artificial Intelligence craze by purchasing a popular "AI" chatbot. ABC Corporation could buy the chatbot for $75.0 million cash. ABC Corporation suspects the chatbot would be useful to them for two years, at which time technological growth would make it nearly obsolete. In the first year, ABC Corporation expects cash flows from subscriptions and advertising of $5.5 million, $6.8 million, $7.6 million, and $8.3 million, respectively. In the second year, ABC Corporation expects cash flows from subscriptions and advertising of $8.0 million, $6.4 million, $3.8 million, and $1.1 million. At the end o its two-year life, the chatbot could be sold for $4.0 million a) ABC Corporation assigns a discount rate of 23.5% to this project, should they invest? (23 marks) b) The IRR for this project is 21.5%. Based on IRR and ignoring the result from part a), should ABC Corporation invest?
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