You are considering paying $50 million to acquire the rights to a video platform and have collected the following information.

The platform currently has 3 million users, but makes no revenue from them.
If you spend $500 million, you can convert this platform to a subscription-based business any time over the next five years (but not beyond). Based upon your current assessments, you estimate that your expected after-tax cash flow from a subscription-based business will be $18 million next year, growing at 2% a year, in perpetuity. The 5-year riskfree rate is 2% and the cost of capital is 8%.
There is substantial uncertainty associated with the subscription-based business, and the standard deviation in the present value of the annual cash flows is 30%.
The platform costs $4.5 million a year to run, in its current form, but that cost will disappear if the platform becomes subscription based.
Estimate the value you will gain or lose by investing in this platform. (Specify your inputs to the option pricing model first, and then proceed with the rest of the problem).

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Answer rating: 100% (QA)

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