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A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture capitalist. The patent has a 17-year life. The technology will take a year to implement (there are no cash flows in the first year) and has an upfront cost of $100 million. You believe this technology will be able to capture 1% of the Internet search market, and currently this market generates profits of $1 billion per year. Over the next five years, the probability that profits will grow at 10% per year is 20% and the probability that profits will grow at 5% per year is 80%. This growth rate will become clear one year from now (after the first year of growth). After five years, profits are expected to decline 2% annually. No profits are expected after the patent runs out. The discount rate is 10%. Calculate the NPV of undertaking the investment today. Express your answer in millions of $.

A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture capitalist. The patent has a 17-year life. The technology will take a year to implement (there are no cash flows in the first year) and has an upfront cost of $100 million. You believe this technology will be able to capture 1% of the Internet search market, and currently this market generates profits of $1 billion per year. Over the next five years, the probability that profits will grow at 10% per year is 20% and the probability that profits will grow at 5% per year is 80%. This growth rate will become clear one year from now (after the first year of growth). After five years, profits are expected to decline 2% annually. No profits are expected after the patent runs out. The discount rate is 10%. Calculate the NPV of undertaking the investment today. Express your answer in millions of $.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture capitalist. The patent has a 17-year life. The technology will take a year to implement (there are no cash flows in the first year) and has an upfront cost of $100 million. You believe this technology will be able to capture 1% of the Internet search market, and currently this market generates profits of $1 billion per year. Over the next five years, the probability that profits will grow at 10% per year is 20% and the probability that profits will grow at 5% per year is 80%. This growth rate will become clear one year from now (after the first year of growth). After five years, profits are expected to decline 2% annually. No profits are expected after the patent runs out. The discount rate is 10%. Calculate the NPV of undertaking the investment today. Express your answer in millions of $.
Transcribed Image Text:A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture capitalist. The patent has a 17-year life. The technology will take a year to implement (there are no cash flows in the first year) and has an upfront cost of $100 million. You believe this technology will be able to capture 1% of the Internet search market, and currently this market generates profits of $1 billion per year. Over the next five years, the probability that profits will grow at 10% per year is 20% and the probability that profits will grow at 5% per year is 80%. This growth rate will become clear one year from now (after the first year of growth). After five years, profits are expected to decline 2% annually. No profits are expected after the patent runs out. The discount rate is 10%. Calculate the NPV of undertaking the investment today. Express your answer in millions of $.
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