A Company Looking for Venture Capitalist Funding Is Deciding on the Design

question 17

Essay

A company looking for venture capitalist funding is deciding on the design of its operating system (OS) for its new phone. The first option is to simply buy the OS from another company. This would result in sales of either 10,000 units if the market is not crowded with similar phones or sales of only 3,000 units if the market is crowded. If the company decides to design its own OS the phone would have sales of 70,000 units if the OS was popular but sales of only 2,000 if the OS was a failure. Suppose that to recoup the cost of designing their own OS the company would need to sell twice as many phones as when they simply buy the OS for the profit from the scenarios to be equal. Which option should the company choose if the probability that the market is/ is not crowded is 50% and the probability that the OS is popular is 75%?

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Definitions:

Scrap Value

The calculated resale value of an asset at the termination of its functional life.

MACRS Tables

Guidelines used in the United States for calculating depreciation deductions for tax purposes under the Modified Accelerated Cost Recovery System.

Allowable Depreciation

The deduction a company can take over the useful life of an asset, as determined by tax laws, to account for wear and tear.

Straight-Line Method

A method of calculating depreciation by evenly spreading the cost of an asset over its useful life.