A company is developing a new technology, and has reached the following milestones, with expenditures in as-spent
dollars: TRL 1 complete: end of 2010, $0.65 M TRL 2 & 3 complete: end of 2011, $2.53 M TRL 4 complete: end of 2013, $6.71 M (expenditures equally distributed during TRL4) TRL 5 complete: end of 2014, $11.4 M TRL 6 complete: end of 2016, $16.8 M (expenditures equally distributed during TRL6) On average, inflation is 2%. In a meeting a the beginning of January 2020 with the head of Marketing and the Chief Technology Officer, the following projection is made for subsequent milestones: TRL 7 & 8 will be complete by end of 2021: $19.4 M (with expenditures equally distributed between 2020 and 2021) TRL 9 will be complete by end of 2022: $38.6 M Expected cash flows (revenue minus direct expenses, which includes any cost of financing) from sales are projected to be $25 M per year for each of the first 3 years of commercial production, and then $63 M per year for the next 4 years. The MARR for this product development scheme is 10%.
a) Construct the cash flow series of as-spent and future sums. __________________________________________________________________ time |
b) Find the pre-tax, inflation-corrected NPV, IRR, and simple payback. The University of Alberta ENGM 620 Engineering Economic Analysis and Technology Investment Risk Evaluation Page 5 of 5 © MGL 2020 NPV______________ IRR ____________________ Payback ______________
c) Find the pre-tax, inflation-corrected NPV, IRR and payback for the pessimistic case when the future technology development expenditures are 20% higher than stated, and the cash flow from production is 20% lower than expected. NPV______________ IRR ____________________ Payback ______________
d) Find the pre-tax, inflation-corrected NPV, IRR and payback for the optimistic case when the future technology development expenditures are 20% lower than stated, and the cash flow from production is 20% higher than expected. NPV______________ IRR ____________________ Payback _____________
_ e) Construct a new cash flow series that shows the variability of the receipts and disbursements discussed in parts c) and d). __________________________________________________________________ time |
f) In your opinion, which is more likely, the pessimistic case, or the optimistic case? Why?
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