Valuing a Company with a Product Patent
Cyclops Inc., a high technology company specializing in state-of-the-art visual technology, is considering going public. While the company has no revenues or profits yet on its products, it has a ten-year patent to a product that will enable contact lens users to obtain maintenance-free lens that will last for years. While the product is technically viable, it is exorbitantly expensive to manufacture, and its immediate potential market will be relatively small. (A cash flow analysis of the project suggests that the present value of the cash inflows on the project, if adopted now, would be $250 million, while the cost of the project will be $500 million.) The technology is rapidly evolving, and a simulation of alternative scenarios yields a wide range of present values, with an annualized standard deviation of 60%. To move toward this adoption, the company will have to continue to invest $10 million a year in research. The ten-year
bond rate is 6%.
A. Estimate the value of this company.
B. How sensitive is this value estimate to the variance in project cash flows? What broader lessons would you draw from this analysis?