Question
Your company has $10,000,000 in excess cash - more than you need to provide a cushion on your balance sheet to protect against risk. Jane,
Your company has $10,000,000 in "excess cash" - more than you need to provide a cushion on your balance sheet to protect against risk. Jane, your crack financial analyst, has prepared an option for you to consider:Spend the $10,000,000 this year and another $10,000,000 next year on inventing the CPRA product. Jane says you will yield zero incremental after-tax contribution margin the following year, but $2.5m the year after that, $5m the year after that, and $10m per year thereafter until year 15, at which point Jane says it's reasonable to assume that the CPRA product will have been supplanted by other technologies. At adiscount rate of 20%, what is the value of option Dto current shareholders? It it: -1,765,556 or 5,981,356 or 6,392,072 or 6,971,966?
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