1. Following is the projected net income stream associated with the use of Zartek technology. (Note: this net income stream does not take into account that Zartek’s owners invested $2,000 to develop Zartek in Year 0.) Globus Maximus Enterprises would like to buy the Zartek patent. How could the net income data be used to help establish the dollar value of the technology (assume a prevailing interest rate for the five year time period as 7% per year)? Show your reasoning in establishing a sales price. Be realistic in your analysis (i.e., are there other factors that should be taken into account than what is covered here?).
Net income: Year 1 Year 2 Year 3 Year 4 Year 5 $1,000 $1,300 $1,200 $1,300 $1,200
Initial investment in Zartek technology: $2,000
To establish the dollar value of the Zartek technology, we need to calculate the present value of the projected net income stream. The net income figures provided are for each year from Year 1 to Year 5.
To begin, we need to calculate the present value of each year's net income by discounting it using the prevailing interest rate of 7% per year. The formula for calculating the present value is:
Present Value = Future Value / (1 + interest rate)^number of periods
Using this formula, we can calculate the present value for each year's net income as follows:
Year 1: Present Value = $1,000 / (1 + 0.07)^1 = $1,000 / 1.07 = $934.58 (rounded to the nearest cent)
Year 2: Present Value = $1,300 / (1 + 0.07)^2 = $1,300 / 1.1449 = $1,133.49 (rounded to the nearest cent)
Year 3: Present Value = $1,200 / (1 + 0.07)^3 = $1,200 / 1.225 = $979.59 (rounded to the nearest cent)
Year 4: Present Value = $1,300 / (1 + 0.07)^4 = $1,300 / 1.3108 = $990.46 (rounded to the nearest cent)
Year 5: Present Value = $1,200 / (1 + 0.07)^5 = $1,200 / 1.4026 = $855.43 (rounded to the nearest cent)
Next, we sum up the present values of all five years' net incomes to find the total present value:
Total Present Value = $934.58 + $1,133.49 + $979.59 + $990.46 + $855.43 = $4,893.55 (rounded to the nearest cent)
Lastly, we need to consider the initial investment in Zartek technology, which was $2,000. We subtract the initial investment from the total present value to obtain the net present value:
Net Present Value = Total Present Value - Initial Investment = $4,893.55 - $2,000 = $2,893.55
Based on this analysis, the net present value of the projected net income stream associated with the Zartek technology is $2,893.55. This could be used as a starting point to establish the sales price. However, we should also consider other factors such as market demand, potential competition, intellectual property protection, and potential future developments that may positively or negatively impact the value of the technology.
To establish the dollar value of the Zartek technology, we can use the concept of net present value (NPV) which takes into account the time value of money. The NPV calculates the present value of future cash flows by discounting them at a predetermined interest rate.
To calculate the NPV, we first need to discount each year's net income stream to its present value. Considering the prevailing interest rate for the five-year time period is 7% per year, we can discount the net income streams as follows:
Year 1: $1,000 / (1 + 0.07)^1 = $935.48
Year 2: $1,300 / (1 + 0.07)^2 = $1,105.14
Year 3: $1,200 / (1 + 0.07)^3 = $1,003.54
Year 4: $1,300 / (1 + 0.07)^4 = $1,054.07
Year 5: $1,200 / (1 + 0.07)^5 = $936.58
Next, we sum up the present values of each year's net income:
$935.48 + $1,105.14 + $1,003.54 + $1,054.07 + $936.58 = $5,034.81
Since the initial investment in Zartek technology was $2,000, we subtract this investment from the total present value to determine the net present value:
$5,034.81 - $2,000 = $3,034.81
The net present value represents the additional value gained from the investment in the Zartek technology. Thus, we can consider this value as the potential sales price of the patent.
It's important to note that this analysis is based solely on the projected net income stream and the prevailing interest rate. Other factors that should be taken into account when establishing the sales price could include market demand for the technology, competition, potential growth rate, industry trends, and any potential risks or uncertainties associated with the technology.