Question

# A side-venture Jane is an inventor, working for the ACME Gadget Company in research and development....

A side-venture Jane is an inventor, working for the ACME Gadget Company in research and development. She recently proposed the development of an advanced technology, but it was deemed too risky for R&D at ACME. However, ACME has agreed that if Jane successfully develops the technology on her own, ACME will acquire a license to use the technology for a period of 10 years. To develop the technology will require an initial expenditure of \$150,000 and an additional expenditure of \$150,000 at the end of each of the next 2 years. When the patent is approved in Year 4, it is expected to be licensed to the ACME Gadget Company for an upfront fee of 100,000 plus an additional fee of \$90,000/year for 10 years. At that time the product that uses the technology will be replaced by a new model. What is the rate of return on the Jane’s advanced technology?

Please include calculations and diagrams.

#### Homework Answers

Answer #1
 Given Information Initial Expenditure \$150000 Additional Expenditure 1st Year \$150000 2nd Year \$150000 From 4th Year Upfront Fee \$100000 Add Fee/Year for 10Years \$90000
 Year Cash Outflow Cash Inflow Net Cashflow 0 -150000 0 -150000 1 -150000 0 -150000 2 -150000 0 -150000 3 0 0 0 4 0 190000 190000 5 0 90000 90000 6 0 90000 90000 7 0 90000 90000 8 0 90000 90000 9 0 90000 90000 10 0 90000 90000 11 0 90000 90000 12 0 90000 90000 13 0 90000 90000 Total(Profit) 550000

Return on Investment=Profit/Cost of Investment

=550000/450000

Rate of Return on Investment=122%

Internal rate of Return=13%

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