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 technology, we need to consider the net income stream associated with its use and the prevailing interest rate.
Step 1: Calculate the present value of the net income stream.
The present value (PV) of a future cash flow is determined by discounting it back to the present using the prevailing interest rate. In this case, the prevailing interest rate is 7% per year.
PV = (Net Income Year 1 / (1+Interest Rate)) + (Net Income Year 2 / (1+Interest Rate)^2) + ... + (Net Income Year n / (1+Interest Rate)^n)
PV = ($1,000 / (1+0.07)) + ($1,300 / (1+0.07)^2) + ($1,200 / (1+0.07)^3) + ($1,300 / (1+0.07)^4) + ($1,200 / (1+0.07)^5)
Calculating this will give us the present value of the net income stream.
Step 2: Subtract the initial investment.
The present value obtained in Step 1 includes the initial investment of $2,000. To determine the value of the technology without considering the initial investment, subtract it from the present value.
Technology Value = PV - Initial Investment
This will give us the value of the technology based on the net income stream and the prevailing interest rate.
Step 3: Additional factors to consider.
While this analysis provides an estimate of the technology's value, there are other factors that should be taken into account to be realistic. Some of these factors include:
1. Market potential: Assess the potential market size and demand for the technology.
2. Competition: Evaluate the presence of competitors and their offerings, as well as any barriers to entry.
3. Intellectual property: Consider the strength and protection of the patent, including any potential infringements.
4. Development and maintenance costs: Determine the costs associated with further development, maintenance, and potential upgrades.
5. Market trends and dynamics: Analyze the market trends, including technological advancements and future prospects.
6. Risk factors: Consider any risks associated with the technology, market, or industry.
Taking these factors into account will provide a more comprehensive and realistic analysis of the technology's dollar value.