The Maxwell School
Syracuse University
Syracuse University
Due Thursday 5/2 on Teams by 11:59 pm
Use the template on Teams to prepare a clear and concise memo summarizing the fuel cell investment decision. A graph or table may be useful for illustrating key points but everything must be explained clearly in words as well.
Please note that this is an individual assignment: you must write the memo yourself rather than working in a group. Also, this exercise is graded partly on the quality of your exposition: that is, how clearly and concisely you present the analysis, so please pay attention to logical organization, appropriate pargraphing, and correct spelling and grammar.
The sections in the template should have the information indicated below. Please use single spacing and don't exceed 2 pages. Also, do NOT include cash flow diagrams or decision trees: any illustrations should be tables or graphs of PVs or EVs.
This should be a brief summary of the research opportunity. To make things concrete, describe the goal of the project to be a patent that would make fuel cells more efficient, and describe the payoff from developing it (the $10 million) as royalties on the patent. The section should describe the costs and benefits clearly, including their timing. When discussing the timing, use calendar years rather than years from the start of the project; that is, the project would start in 2024 (rather than year 0) and the first royalty payment would be in 2035 (rather than year 11). This section should not discuss financing at all (that's in the next section) or the evaluation of the lab (that's later as well).
This section should explain that the project would be financed via a bond, and should explain the details. As with the previous section, use calendar years when discussing dates. This section should just describe the financing but not evaluate it: that's in the next section.
This section should present your analysis for the three interest rates in the original problem. It should discuss the present values of the two components separately (patent development and financing), as well as the overall total.
After discussing the results for the three interest rates, it should then briefly discuss interest rate risk and present an overall EV for the project given the following probabilities for the interest rates: 25% chance of 4%, 50% chance of 5%, and 25% chance of 6%. In describing the probabilities, you can say that they are based on recent historical data (i.e., something like "Based on recent historical data, the chance that over the life the project the interest rate will be X is Y percent...").
Present a concluding recommendation based on your EV results. You should assume that the firm is risk neutral and makes decisions based purely on expected value. However, include a caveat noting that the actual payoff will differ, and give the range of possible outcomes.