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Yuli-One Copters is in the business of designing and manufacturing helicopters for commercial, military and pleasure use.They are considering a $200 million upgrade to their production line for the Yuli Jumper-a two person helicopter with a payload of 300 pounds plus the two occupants.The potential cash flow is estimated at net revenues of $85 million per year for seven years.Recently, they were advised of potential patent infringement and to eliminate this problem they are considering buying a license. SohnCo will sell a license is good for two years of exclusive use of the patent.Yuli-One Copters uses a corporate MARR of 18% and their risk-free alternatives are 4%.The VP of Engineering at Yuli-One Copters estimates market volatility in demand is 40%.The VP of Marketing estimates market volatility in demand at 35%.
1. Since the VP's trust you, they asked you to figure out the most they should pay for a license from SohnCo. Explain your answer in detail.
2. Yuli-One Copters 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 AllaCo $300 million.Because Yuli Copters 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
3. How does this strategy work for them?Are they better off licensing or being aggressive?Explain your answer in detail.
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