Your R&D Group Has Developed and Tested a Computer Software

question 7

Essay

Your R&D group has developed and tested a computer software package that assists engineers to control the
proper chemical mix for the various process manufacturing industries. The total investment in developing the
product was estimated to be $1,500,000. If you decide to market the software, your first year operating net cash
flow is estimated to be $1,000,000. Because of market competition, product life will be about 4 years, and the
product's market share will decrease by 25% each year over the previous year's share. You are approached by a
big software house which wants to purchase the right to manufacture and distribute the product. Assuming that
your interest rate is 15%, for what minimum price would you be willing to sell the software?

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Definitions:

Indifferent

A state of neutrality or lack of preference between two or more choices or outcomes.

Alternatives

Different options or choices available to replace or serve as substitutes for something else.

High Demand

A market condition where the desire and readiness of consumers to purchase a product significantly exceeds the supply, often leading to increased prices.

Probability

The measure of the likelihood that an event will occur, expressed as a number between 0 and 1, where 0 indicates impossibility and 1 indicates certainty.