Follow-up rights to the emerging contract inventors:

Agrisurge Co (ASC) is a successful company focusing on the search for new talents (e.g. inventors) that contribute to the innovation of automative argicultural processes (harvesting, fruit picking, ploughing, and others) in the Bay of Plenty area. Since ASCs mission is to constantly search for new inventors, it is a normal practice for the company to spin off its rights to subsequent works which will be generated by inventors under its umbrella at the earlier stage. In the beginning of 2017, ASC is offering to sell the rights to commercialise subsequent inventions/patents by a portfolio of its top 30 successful newcomers (success defined as the first patent sold for 1 milion dollars or more). Given the variety of different processes and type of agricultural produces, patents sold for these 30 inventors range from 1 million dollars to as high as a whopping 9 million dollars (few revolutionary technologies). The average value of patents sold is 2 million dollars.ASC sets the price to such exclusive rights (on 30 emerging inventors patents to their new inventions bundled together) as 13 million dollars.

MacGyver Farming Techonology Co (MFT) is an established nationtal (and thus more diversified) farming technology company and is now considering ASCs proposal. The financial manager of MFT has been gathering the relevant information as follows:

- It will take time to work on and materialise the new patents by these 30 inventors. On average, this will lead to the cash flows received at the end of 2019 (lumpsum for simplification).- Out of the whole lot of 30 inventors (one inventor is aimed for one patent/invention), it is estimated that 80% will be able to produce something marketable. Of these marketable inventions, the estimated revenue on selling a patent is 2.5 million dollars on average. The discount rate used by farming technology industry is 14%. - For the above patents to create revenues, decisions need to be made at the beginning of 2019. As a well-established and seasoned company in the field, MFT is quite certain about the costs involved in developing and marketing (e.g. commercialising) new patents. According to MFTs estimation, it will cost altogether $140 million for the whole thing regardless of how many inventions/patents will be commercialised out of the 30 possible inventions. This cost will incur at the beginning of 2019 ONLY if MFT decides to go forward with these inventions at that point in time. Also assume that costs will be incurred right at the beginning of year 2019 (for simplicity) if the decision is made to go forward. - Risk free rate is 4% per year.- Uncertainty in the farming technology industry is quite high. Variance in the sales/returns of these 30 inventors as provided by ASC was 80%. MFT believes that such estimation will also be valid for use at the end of 2019.

Answer the following questions:

1) Calculate the value of rights to commercialise follow-up patents by emerging inventors under ASC umbrella as offered in the deal. Should MFT buy it accordingly?( 5 points)

2) Assume that the nature of risk associated with the farming technology industry is geographically oriented. In other words, there could be negative shocks in demand for new farming technology that apply to only certain areas in the country. As a result, ASC (Bay of Plenty based) offers to MFT (nation-wide based) the option to sell the rights back to them at the end of year 2018 for 5 million dollars. How would this impact MFTs decision? Prove your point with the calculation. Assume that real asset involved in the calculation does not erode with time.( 5 points)

3) Continued on from Question 2) above, what is the minimum sell back price that would be attractive toMFT?( 3 points)

(Total: 13 points)