Lets continue with the Healy Pharmaceuticals sludge business from the Week 11 Thursday Night Assignment. Other than drawing on specific details as necessary, ignore any information about timing from the earlier problem. Assume it is January 1, Year 1. Healys Strategic Technology Analysis Team (STAT) has become aware of the very early work on the zero-discharge closed-loop waste treatment system. STAT believes that it will take 40 months of research and testing before the various regulatory agencies would approve installation of the new technology. Such installation would then require 17 months before changeover to the new system could be implemented. On January 1, Year 1, Healys D/E ratio is 7 to 5. Healys average interest payments on its long- term debt are at a rate of 7% and its marginal tax rate is 35%. Healys common stock is 1.6 times as risky as the S&P 500. Current T-bill rates are 3% for one-year notes and 6% for 10-year notes. Because the volatility of returns to new environmental treatment technology is so high (95%), STAT believes the appropriate discount rate for this project is 20% (not 20 percentage points) higher than the companys WACC. STAT estimates that sludge will sell for $75 per pound and that Healy will generate 2,000 pounds per year. Filtration material costs will be $25,000 per year, with other operating cost estimates unchanged. The necessary capitalizable expenditures if Healy implements the new technology will all be 30% greater than the original estimates, with potential salvage value of the hardware equal to $50,000. The useful life should be about eight years. Assume as well that STAT believes implementing the new technology could bring green benefits to Healy from being able to promote its use of the new technology that have a present value of $604,000 as of January 1, Year 1. Finally, on December 31, Year 0, Healy can pay $308,000 (pre-tax) for exclusive rights to the new technology. This investment would be expenses immediately. What is the maximum (constant) annual spending (pre-tax) on technology development that Healy can invest over the next four years such that acquiring the exclusive rights is a positive total value investment? Notes There are four separate numerical components to this analysis that you must combine in the correct way to solve for the unknown amount. One of those components is a real option.