Altenergy has the opportunity to license a technology, WiCharge?, that through a variety of green sources (including solar, body heat, motion of the user, etc.) allows handheld devices such as tablets and cell phones to function without being plugged in for 400% longer than the battery alone will allow. The prototypes the firm has developed are designed to fit as a cover, where the cover protects and also plugs into the power input for the device. The demand for such a product is expected to be explosive, as no competing device will be ready for the market for at least 2 years. First year sales figures estimate that 1 million devices can be sold for an average of $80 each. Sales volume will grow by 75% in the second year, but then will decrease by 50% in year 3 and no devices will be sold in the fourth year. The devices will be sold at $80 in all 3 years. The margins on the initial sale are very high (around 70%), but one drawback is that the EPA has mandated that Altenergy must collect and dispose of the devices because the materials (while safe for humans) have detrimental environmental effects if disposed of improperly. The devices will last 2 years, at which time the firm must pay an estimated $7.00 per device for disposal and $20 as an incentive to encourage customers to recycle the devices. Altenergy has agreed to pay the EPA a fine of $27 for every Altenergy device that is not returned by the end of year 5. They anticipate that 90% of devices will be returned for recycling very close to 2 years after the sale (those not returned by two years will never be returned), and they will pay the fine at the end of year 5 for the rogue devices. The license fee to use the technology (which is owned by a prestigious university) is $77M upfront and $10M for every year devices are sold. Assume this license fees are immediately tax deductible at the time they are paid and the tax rate is 35% for Altenergy. The excel table provided translates the text of the problem, into a cash flow table.

Complete the missing items and then answer the following questions:

a) What is the payback period? Would you decide to pay the license fee and undertake MBA@UNC Altenergy - 2 the project if your decision rule required payback within 3 years? 5 years?

b) Use the excel IRR function with a guess of 3%, what is the IRR and what would your decision be if the appropriate discount rate is 10%? Repeat for a guess of 15%, what is the IRR and what would your decision be if the appropriate discount rate is 10%? Use the IRR investing rule only for your decision.

c) According to the NPV decision rule, should the Altenergy managers agree to pay the licensing fees for WiCharge? if the appropriate discount rate is 10%? What if the appropriate discount rate is 15%?

d) Use your answers for parts a, b and c to create a plot (x=Rate,y=NPV), what does the graph of the NPV for this project look like using discount rates from 0%-15%?

J 90% B C D E H I 1 Note: The formulas have been removed, but it would be great practice to input your own formulas to understand how to calculate these results 2 3 Assumptions given 4 Initial License Fee (SK) $(77,000) 5 Annual License Fee (SK) $(10,000) 6 Device Price ($) $ 80.00 7 Margin 70% Please complete these cells 8 Reclamation Cost ($) $ 27.00 9 Device Return rate 10 Tax 35% 11 Discount rate 1 10% 12 Discount rate 2 15% 13 14 Sales year 3 4 15 Sales Initial and Growth 1,000 75% -100% 0% 16 17 Numeric Solution 18 Devices sold 1,000 1,750 19 Devices returned O 900 1,575 20 Devices not returned 21 22 23 Year 34 24 Revenue $ - $ 80,000 $ 140,000 $ - $ 25 Production costs $ - $ (24,000) $ (42,000) $ 26 Return costs & Fines $ - - $ 24,300) $ (42,525) 27 Fees $ (77,000) $ (10,000) $ (10,000) $ 28 Operating Earnings $(77,000) $ 46,000 $ 88,000 $ (42,525) 29 Tax $ 26,950 $ (16,100) $ (30,800) $ 14,884 30 Total Cash Flow $(50,050) $ 29,900 $ 57,200 $ (27,641) 0 31 22