You explore how much it would cost to build a product with your own technology team You work with the sales team to understand the revenue potential of your product You develop the following projections An upfront investment of $3 5M at the beginning of year 0 is required to build the product in house It will require 1 year to build the product, and it will be launched into the market at the beginning of year 1 The product would target your current user base, rather than attracting new users Revenue from the new product is forecast to be $1 6M in the first year on the market, growing by $160K annually Your analysis does not include any new competitors Ongoing operating costs (after the initial investment) to service the solution and provide routine enhancements would be 40 of revenues The technology landscape is rapidly evolving so the product is expected to have a useful market life of 6 years, after which it has no commercial value The CEO of the startup that has a product that is ready to launch, but is not yet in the market, is willing to form a joint venture and has proposed the following An upfront investment of $3 25M at the beginning of year 1 Revenues are forecast be $2 5M for Year 1 and increase by $200K annually Your company incurs 50 of the operating costs, and retains 60 of the revenues Ongoing operating costs (after the upfront cost) to service the product and provide routine enhancements would be 50 of revenues If you do nothing, you estimate that you will lose some of your current customers However, you believe you can stem the loss if you invest heavily in advertising You develop the following projections You can make an upfront investment of $70K at the beginning of year 1 for a 6 year advertising contract Operating costs are 40 of revenues The incremental revenue is forecast to be $100K in Year 1, declining by $15K annually The CFO of your company has told you to use 8 cost of capital for each scenario The head of your IT department has determined that hiring contractors will mitigate the risk of a delay, but it would increase the build cost by 15 What recommendation would you make to the CEO Explain your rationale using NPV, 5 year ROI, and 5 year IRR as metrics, and the companys strategy as the context (25 Points)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 20, 2024

You explore how much it would cost to build a product with your own technology team. You work with the sales team to understand the

You explore how much it would cost to build a product with your own technology team. You work with the sales team to understand the revenue potential of your product. You develop the following projections:

An upfront investment of $3.5M at the beginning of year 0 is required to build the product in-house. It will require 1 year to build the product, and it will be launched into the market at the beginning of year 1.
The product would target your current user base, rather than attracting new users. Revenue from the new product is forecast to be $1.6M in the first year on the market, growing by $160K annually. Your analysis does not include any new competitors.
Ongoing operating costs (after the initial investment) to service the solution and provide routine enhancements would be 40% of revenues.
The technology landscape is rapidly evolving so the product is expected to have a useful market life of 6 years, after which it has no commercial value.

The CEO of the startup that has a product that is ready to launch, but is not yet in the market, is willing to form a joint venture and has proposed the following:

An upfront investment of $3.25M at the beginning of year 1.
Revenues are forecast be $2.5M for Year 1 and increase by $200K annually.
Your company incurs 50% of the operating costs, and retains 60% of the revenues.
Ongoing operating costs (after the upfront cost) to service the product and provide routine enhancements would be 50% of revenues.

If you do nothing, you estimate that you will lose some of your current customers. However, you believe you can stem the loss if you invest heavily in advertising. You develop the following projections:

You can make an upfront investment of $70K at the beginning of year 1 for a 6 year advertising contract
Operating costs are 40% of revenues.
The incremental revenue is forecast to be $100K in Year 1, declining by $15K annually.

The CFO of your company has told you to use 8% cost of capital for each scenario.

The head of your IT department has determined that hiring contractors will mitigate the risk of a delay, but it would increase the build cost by 15%. What recommendation would you make to the CEO? Explain your rationale using NPV, 5-year ROI, and 5-year IRR as metrics, and the companys strategy as the context. (25 Points)