Option 1

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

€m €m €m €m €m €m
Plant (9.0) 1.0
Sales 24.0 30.8 39.6 26.4 10.0
Variable Costs (11.2) (19.6) (25.2) (16.8) (7.0)
Fixed Costs (Ex. Dep) (0.8) (0.8) (0.8) (0.8) (0.8)
W. Capital (3.0) 3.0
Opportunity Costs (0.1) (0.1) (0.1) (0.1) (0.1)
(12.0) 11.9 10.3 13.5 8.7 6.1
Discount Factor 10% 1 .909 .826 .751 .683 .621
Present Value (12.0) 10.82 8.51 10.14 5.94 3.79
NPV = 27.2

Option 2

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

€m €m €m €m €m €m
Royalties 4.4 7.7 9.9 6.6 2.8
Discount Factor 10% 1 .909 .826 .751 .683 .621
Present Value 4.0 6.4 7.4 4.5 1.7
NPV = 24.0

Option 3

Year 0 Year 2
Instalments 12.0 12.0
Discount Factor 10% 1 .826
Present Value 12 10.0
NPV = 22.0

b) Before making a final decision, the board should consider the following
factors:

 The long-term competitiveness of the business mat be affected by the sale of

the patents
 At present, the business is not involved in manufacturing and marketing
products.
 The business will probably have to buy in the skills necessary to produce the
product itself.
 How accurate are the forecasts made and how valid are the assumptions on
which they are based?

c) Option 2 has the highest NPV and therefore the most attractive to
shareholders. However, the accuracy of the forecasts should be checked
before a final decision is made.