Dupont is considering licensing a low liquid discharge (LLD) water treatment system from a small company that developed the process and owns the license. Dupont can purchase a 1-year option for $100,000 that will provide time to pilot test the LLD process or Dupont can acquire the license now at a cost of $1.8 million plus 25% of sales paid annually to the license owner. If they wait 1 year, the cost will increase to $1.9 million plus 30% of sales paid annually. If sales are estimated to be $1,000,000 per year over the 5-year license period, should Dupont purchase the license now or purchase the option now and possibly license it after the 1-year test period? Assume the MARR is 15% per year.
What will be an ideal response?
PWNow = -1,800,000 + 1,000,000(0.75)(P/A,15%,5)
= -1,800,000 + 1,000,000(0.75)(3.3522)
= $714,150
PW1 year = -100,000 – 1,900,000(P/F,15%,1) + 1,000,000(0.70)(P/A,15%,5)(P/F,15%,1)
= -100,000 – 1,900,000(0.8696) + 1,000,000(0.70)(3.3522)(0.8696)
= $288,311
Clearly, Dupont should purchase the license now
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