Drew Co$.$ Inc. $($DCI$)$ is evaluating whether or not to do an interesting project. The plan calls

for a one$-$time investment of $$2\mathrm{.}5M($million$).$ It is dependent on some new technological

improvements and approval by Federal regulators. If successful the project anticipates

paying annual Royalty profits $($after tax OCF$)$ of $$200,000$ and $$400,000$ in year $1$ and $2,$

$$600,000$ in year $3$; thereafter, payments are estimated to grow at $3\mathrm{.}0\%$ for the $10$ years that

would remain on the patent. If the plan cannot develop the final technology pieces and$/$or

the Fed's request the program, DCI will unwind the inventory and materials for a salvage

value of $$650,000$ after$-$tax. The firm estimates a $35\%$ chance of failure and a $65\%$ chance of

success. Use an $18\%$ required return to evaluate. What is the Net Present Value to

shareholders?

Answer:

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