Your friend had quit his job in pursuit of making a new material that would be quite strong for its weight. He has spent $100,000 of his own money and has borrowed another $200,000. That was 15 months ago. He has made substantial progress and is 80% sure that the few manufacturing bugs could be worked out. He is projecting sales of $35 million over 10 years with net profit of $8 million. He normally would not talk to you, but showed up one morning asking for your advice. The company he used to work for has contacted him, offering him $50,000 a year salary and 6% royalty on sales of the new material, if he transferred the rights to the new material to the company. A few days later the company had also called and given him a second alternative. He could take $500,000 lump sum now, plus an option contract for 70,000 shares at price of $40 per share, three years from now. The company expects the new material to be ready for the market in 18 months. If the new material became a success, the companys stock price would increase to $52 per share, but if it fails, the price would drop to $39 per share. In either alternative, the company would pay off your friends creditors. He adds that the company has also threatened that if he did not accept any of the two offers, they would file a lawsuit claiming that he had used the knowledge that belonged to the company to develop the new material. He has talked to a lawyer who has told him the court costs would be $20,000 and there would be 60% chance that he would win the case. If he won, the company would pay the court costs.

Decision Analysis

1. Develop the business model for the decisions your friend faces. Assume a discount rate of 8% in your calculations. 2. Perform sensitivity analysis as needed. 3. Based on all the analysis you have done, what will you tell your friend?