a) Your research and development division has just invented a new type of screen for smartphones; you have given the go

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A Your Research And Development Division Has Just Invented A New Type Of Screen For Smartphones You Have Given The Go 1 (282.02 KiB) Viewed 18 times

a) Your research and development division has just invented a new type of screen for smartphones; you have given the go ahead to try to produce it commercially. It will take five years to find out whether the screen is commercially viable, and you estimate that the probability of its success is 22%. Development will cost £8.0 million per year, paid at the beginning of each year. If development is successful and you decide to produce the screen, a factory extension will be built immediately. The factory will cost £1,100 million to put in place and will generate profits of £80 million at the end of every year in perpetuity. Assume that the current five-year risk-free interest rate is 9.2% per year, and the yield on a perpetual risk-free bond will be 10.0%, 9.0%, 7.0%, 6.0% or 4.0% in five years. Assume that the risk- neutral probability of each possible rate is the same. REQUIRED: i) What is the NPV of this project today? (5 marks) ii) Suppose that you can sell the screen prototype to a competitor for £45 million in year 5. This option is available regardless of whether the development stage is successful or not. What is the value of this option? (5 marks) (4 marks) b) How can proxy contests be used to overcome a captured board? c) What are the advantages and disadvantages of increasing the options granted to CEOS? (3 marks)