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# DEVELOPING AND SELLING AN INNOVATIVE IDEA Background Three engineers who worked for Mitchell Engineering, a company specializing in public housing

DEVELOPING AND SELLING AN INNOVATIVE IDEA

Background Three engineers who worked for Mitchell Engineering, a company specializing in public housing development, went to lunch together several times a week. Over time they decided to work on solar energy production ideas. After a lot of weekend time over several years, they had designed and developed a prototype of a low-cost, scalable solar energy plant for use in multifamily dwellings on the low end and medium sized manufacturing facilities on the upper end. For residential applications, the collector could be mounted alongside a TV dish and be programmed to track the sun. The generator and additional equipment are installed in a closet-sized area in an apartment or on a floor for multiple-apartment supply. The system serves as a supplement to the electricity provided by the local power company. After some 6 months of testing, it was agreed that the system was ready to market and reliably state that an electricity bill in high-rises could be reduced by approximately 40% per month. This was great news for low income dwellers on government subsidy that are required to pay their own utility bills.

Case Study Exercises It is now 12 years after the products were developed, and the engineers invested most of their savings in an innovative idea. However, the question of "When do we sell?" is always present in these situations. To help with the analysis, determine the following: 1. The rate of return at the end of year 4 for two situations: (a) The business is sold for the net cash amount of \$500,000 and (b) No sale. 2. The rate of return at the end of year 8 for two situations: (a) The business is sold for the net cash amount of\$100,000 and (b) No sale. 3. The rate of return now at the end of year 12. 4. Consider the cash flow series over the 12 years. Is there any indication that multiple rates of return may be present? If so, use the spreadsheet already developed to search for ROR values in the range _100% other than the one determined in exercise 3 above.

5. Assume you are an investor with a large amount of ready cash, looking for an innovative solar energy product. What amount would you be willing to offer for the business at this point (end of year 12) if you require a 12% per year return on all your investments and, if purchased, you plan to own the business for 12 additional years? To help make the decision, assume the current NCF series continues increasing at \$5000 per year for the years you would own it. Explain your logic for offering this amount.

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