Consider the following scenario Imaginia is a small software startup that is looking to invest in an R D project which critically depends upon a court ruling, expected within the next year, regarding whether one of Googles patents is considered standard essential If the court rules that this patent is standard essential, then Imaginia will have to pay a lower licensing fee to Google than otherwise Imaginia expects the following financials associated with the R D project The fixed cost investment of the R D project is $1 5 million The rate of interest can be assumed fixed at 10 for the relevant time span Imaginia expects that the R D project will yield returns for up to 10 years from the year of investment If Imaginia invests in the R D project today (Year 0), then it can expect $500,000 in cash flows associated with the R D project this year From Year 1 on, there are two scenarios regarding its cash flows, each likely to occur with a probability of 0 5 In Scenario 1, Googles patent is deemed standard essential, and the lower royalty rates to Google imply Imaginia will have $900,000 every year as its cash flow for the next 10 years In Scenario 2, Googles patent is NOT deemed standard essential, and the higher royalty rates to Google will cause Imaginia to make $100,000 in cash flow for the next 10 years Please answer the following questions Showing your work (and rationale) as applicable will help you get partial credit even if the numbers are not completely accurate 1 What is the expected NPV of the project if Imaginia invests today 2 What, if any, is the value of the option to wait one year to make the decision B Given uncertainty regarding how the smartphones industry may evolve, Googles decision to acquire Motorola in 2011 could be considered as a real option Using examples and information from the readings, comment on whether it may fit the following types of real option, and a brief reason for why your answer is yes or no (30 points) Type of Option Yes No Justification for why you believe the real option is applicable to the Motorola acquisition Defer Expand Contract Abandon

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Consider the following scenario: Imaginia is a small software startup that is looking to invest in an R&D project which critically depends upon a court

Consider the following scenario: Imaginia is a small software startup that is looking to invest in an R&D project which critically depends upon a court ruling, expected within the next year, regarding whether one of Googles patents is considered standard essential. If the court rules that this patent is standard essential, then Imaginia will have to pay a lower licensing fee to Google than otherwise. Imaginia expects the following financials associated with the R&D project:
1. The fixed cost investment of the R&D project is $1.5 million. The rate of interest can be assumed fixed at 10% for the relevant time span.
2. Imaginia expects that the R&D project will yield returns for up to 10 years from the year of investment.
3. If Imaginia invests in the R&D project today (Year 0), then it can expect $500,000 in cash flows associated with the R&D project this year.
4. From Year 1 on, there are two scenarios regarding its cash-flows, each likely to occur with a probability of 0.5. In Scenario 1, Googles patent is deemed standard essential, and the lower royalty rates to Google imply Imaginia will have $900,000 every year as its cash-flow for the next 10 years. In Scenario 2, Googles patent is NOT deemed standard essential, and the higher royalty rates to Google will cause Imaginia to make $100,000 in cash-flow for the next 10 years.

Please answer the following questions. Showing your work (and rationale) as applicable will help you get partial credit even if the numbers are not completely accurate.

1; What is the expected NPV of the project if Imaginia invests today?

2; What, if any, is the value of the option to wait one year to make the decision?

B. Given uncertainty regarding how the smartphones industry may evolve, Googles decision to acquire Motorola in 2011 could be considered as a real option. Using examples and information from the readings, comment on whether it may fit the following types of real option, and a brief reason for why your answer is yes or no. (30 points)

Type of Option	Yes/No?	Justification for why you believe the real option is applicable to the Motorola acquisition
Defer
Expand/Contract
Abandon