A company X is investing $20 million upgrade to their production line

Posted on 2014-04-14 04:42:00 in Economics by TYRON

A company X is investing $20 million upgrade to their production line for net revenues of $8.5 million per year for seven years using a new method. However they were advised of potential patent infringement and to eliminate this problem they are considering buying a license. Company Y will sell the license good for two years of exclusive use of the patent. Company X uses MARR of 18% and their risk-free alternatives are 4%. The VP at Company X estimates market volatility in demand is 40%. The VP of Marketing estimates market volatility in demand at 35%.



1. Figure out the most they should pay for a license from Y.



2. Company X is known to be aggressive in ignoring intellectual property claims. Imagine they just go ahead with the project as stated above without buying the license. Sometime in year 3 of 7, a court decision requires them to reimburse the patent owner for $30 million. Because Company X has this strategy, they are tooled up to be in court and they incur minimal extra cost in defending their actions. They finally pay, however, at the end of year 4. How does this strategy work for them? Are they better off licensing or being aggressive? Explain your answer in detail.

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