Background Three engineers who worked for Mitchell Engineering,a company specializing in public housing development, went to lunchtogether several times a week. Over time they decided to work onsolar energy production ideas. After a lot of weekend time overseveral years, they had designed and developed a prototype of alow-cost, scale able solar energy plant for use in multifamilydwellings on the low end and medium sized manufacturing facilitieson the upper end. For residential applications, the collector couldbe mounted along side a TV dish and be programmed to track the sun.The generator and additional equipment are installed in acloset-sized area in an apartment or on a floor formultiple-apartment supply. The system serves as a supplement to theelectricity provided by the local power company. After some 6months of testing, it was agreed that the system was ready tomarket and reliably state that an electricity bill in high-risescould be reduced by approximately 40% per month. This was greatnews for low income dwellers on government subsidy that arerequired to pay their own utility bills. Information With a heftybank loan and $200,000 of their own capital, they were able toinstall demonstration sites in three cities in the sunbelt. Netcash flow after all expenses, loan repayment, and taxes for thefirst 4 years was acceptable; $55,000 at the end of the first year,increasing by 5% each year thereafter. A business acquaintanceintroduced them to a potential buyer of the patent rights andcurrent subscriber base with an estimated $500,000 net cash outafter only these 4 years of ownership. However, after seriousdiscussion replaced the initial excitement of the sales offer, thetrio decided to not sell at this time. They wanted to stay in thebusiness for a while longer to develop some enhancement ideas andto see how much revenue may increase over the next few years.During the next year, the fifth year of the partnership, theengineer who had received the patents upon which the collector andgenerator designs were based became very displeased with thepartnering arrangements and left the trio to go into partnershipwith an international firm in the energy business. With newresearch and development funds and the patent rights, a competingdesign was soon on the market and took much of the business awayfrom the original two developers. Net cash fl ow dropped to $40,000in year 5 and continued to decrease by $5000 per year. Anotheroffer to sell in year 8 was presented, but it was only for $100,000net cash. This was considered too much of a loss, so the two ownersdid not accept. Instead, they decided to put $200,000 more of theirown savings into the company to develop additional applications inthe housing market. It is now 12 years since the system waspublicly launched. With increased advertising and development, netcash fl ow has been positive the last 4 years, starting at $5000 inyear 9 and increasing by $5000 each year until now. Case StudyExercises It is now 12 years after the products were developed, andthe engineers invested most of their savings in an innovative idea.However, the question of âWhen do we sell?â is always present inthese situations. To help with the analysis, determine thefollowing:
1. The rate of return at the end of year 4 for two situations: (a ) The business is sold for the net cash amount of $500,000 and (b ) no sale.
2. The rate of return at the end of year 8 for two situations: (a ) The business is sold for the net cash amount of $100,000 and (b ) no sale.
3. The rate of return now at the end of year 12.
4. Consider the cash flow series over the 12 years. Is there anyindication that multiple rates of return may be present? If so, usethe spreadsheet already developed to search for ROR values in therange -100% to +100% other than the one determined in exercise 3above.
Background Three engineers who worked for Mitchell Engineering,a company specializing in public housing development, went to lunchtogether several times a week. Over time they decided to work onsolar energy production ideas. After a lot of weekend time overseveral years, they had designed and developed a prototype of alow-cost, scale able solar energy plant for use in multifamilydwellings on the low end and medium sized manufacturing facilitieson the upper end. For residential applications, the collector couldbe mounted along side a TV dish and be programmed to track the sun.The generator and additional equipment are installed in acloset-sized area in an apartment or on a floor formultiple-apartment supply. The system serves as a supplement to theelectricity provided by the local power company. After some 6months of testing, it was agreed that the system was ready tomarket and reliably state that an electricity bill in high-risescould be reduced by approximately 40% per month. This was greatnews for low income dwellers on government subsidy that arerequired to pay their own utility bills. Information With a heftybank loan and $200,000 of their own capital, they were able toinstall demonstration sites in three cities in the sunbelt. Netcash flow after all expenses, loan repayment, and taxes for thefirst 4 years was acceptable; $55,000 at the end of the first year,increasing by 5% each year thereafter. A business acquaintanceintroduced them to a potential buyer of the patent rights andcurrent subscriber base with an estimated $500,000 net cash outafter only these 4 years of ownership. However, after seriousdiscussion replaced the initial excitement of the sales offer, thetrio decided to not sell at this time. They wanted to stay in thebusiness for a while longer to develop some enhancement ideas andto see how much revenue may increase over the next few years.During the next year, the fifth year of the partnership, theengineer who had received the patents upon which the collector andgenerator designs were based became very displeased with thepartnering arrangements and left the trio to go into partnershipwith an international firm in the energy business. With newresearch and development funds and the patent rights, a competingdesign was soon on the market and took much of the business awayfrom the original two developers. Net cash fl ow dropped to $40,000in year 5 and continued to decrease by $5000 per year. Anotheroffer to sell in year 8 was presented, but it was only for $100,000net cash. This was considered too much of a loss, so the two ownersdid not accept. Instead, they decided to put $200,000 more of theirown savings into the company to develop additional applications inthe housing market. It is now 12 years since the system waspublicly launched. With increased advertising and development, netcash fl ow has been positive the last 4 years, starting at $5000 inyear 9 and increasing by $5000 each year until now. Case StudyExercises It is now 12 years after the products were developed, andthe engineers invested most of their savings in an innovative idea.However, the question of âWhen do we sell?â is always present inthese situations. To help with the analysis, determine thefollowing:
1. The rate of return at the end of year 4 for two situations: (a ) The business is sold for the net cash amount of $500,000 and (b ) no sale.
2. The rate of return at the end of year 8 for two situations: (a ) The business is sold for the net cash amount of $100,000 and (b ) no sale.
3. The rate of return now at the end of year 12.
4. Consider the cash flow series over the 12 years. Is there anyindication that multiple rates of return may be present? If so, usethe spreadsheet already developed to search for ROR values in therange -100% to +100% other than the one determined in exercise 3above.
