1. Assume that you are interested in acquiring the exclusive rights to market a

Question

1. Assume that you are interested in acquiring the exclusive rights to market a new product. If you do acquire the rights to the product, you estimate that it will cost you $250 million upfront to set up infrastructure needed to provide the service. Based upon your current projections, you believe that the service will generate $75 million in after-tax cash flows each year. In addition, you expect to operate without serious competition for the next 10 years. Assuming a discount rate of 10%, a riskless rate of 4% and a standard deviation of 30% of the project cash flows, find the value of the exclusive rights to this project. ( see Valuing a Patent: The case of Avonex)

A. $62.46 million.

B. $30.60 million

C. $7.88 million.

D. None of the above

2. Consider an offshore oil property with an estimated oil reserve of 100 million barrels of oil. The cost of developing the reserve is expected to be $450 million, and the development lag is 3 years. The firm has the rights to exploit the reserve for the next 10 years and the marginal value per barrel of oil is currently $15. Once developed, the net production revenue each year will be 10% of the value of the reserves. The variance in oil prices is assumed to be 0.05. The riskless rate is 8%. If the development is started today, the oil will not be available for sale until 3 years from now. Given this information, calculate the value of the oil reserve option.

A. $51.40 million.

B. $120.56 million

C. $228.31 million.

D. None of the above

Explanation / Answer

1. b30.60m 2.a.51.40m this are through cakculation thank you

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