Question

Project Details

John and Jane Doe are newlyweds with executive track careers at ACME Gadget Company. In five years, the Does would like to have a family, envisioning two young children, Jack and Jill. With an eye for the future, John and Jane are now looking to ensure that their future family has a place to call home, that their future children will have access to all the education they desire, and that they themselves will be able to enjoy retirement when the time comes. As such, they’ve come to your financial planning company for advice for purchasing a house, planning for retirement, setting up a RESP and for your perspective on a side venture. They’ve provided you with the background and questions below.

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.

Answer 1

Total Investment Value = Initial Expenditure + Additional Expenditure at year 2 end + Additional Expenditure at year 4 end

= 150000 + 150000 + 150000

= $450000

Earnings from ACME = Upfront pay + Additional fees per year for 10 yrs

= 100000 + (90000 x 10)

= $1000000

Return on Investment = (Earnings from ACME – Total Investment value) /  Total Investment value

= (1000000 - 450000) / 450000

= 550000 / 450000

= 1.22

or

=122%

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