Solar Inc has successfully produce solar panels for 5 years and would like to expand into batteries. They have two options to get into the battery production

Option 1: Joint Venture In this option the company teams up with another party (Alternative Inc) to develop and produce batteries. Alternative Inc has already completed the required research. Solar Inc will be required to invest $10,000,000 into the joint venture. The business agreement with the other party lays out a joint project with a time limit of 5 years. Solar Inc had to pay $100,000 for consultant fees to obtain the right business partner.

Option 2: Buy the intellectual property and produce batteries themselves This option would require Solar Inc to produce the battery from a factory premise they currently own and are presently leasing. The lease agreement has a remaining term of 10 years at an annual rental of $100,000. Solar Inc would be required to pay $50,000 compensation up front to the tenant for breaking the agreement early. Purchase of the intellectual property together with the factory set up would cost $20,000,000 and they need to borrow 50% from the bank with an interest of 5% per year, interest-only loan. New experts will be hired to run this operation. The following information is for both options: With the cost of capital of 12% 

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Solar Inc Solar Inc Budgeted Income Budgeted Income Statement Statement Option 1 Option 2 Year 1-5 Year 1 Year 2-10 Revenue $6,000,000 $4,000,000 $4,000,000 $10,000,000 $10,000,000 Sales Total revenue $6,000,000 Expenses $200,000 $2,000,000 $50,000 $450,000 $2,000,000 $200,000 $700,000 $2,000,000 $100,000 Wages Depreciation Marketing expenses $50,000 $50,000 $3,000,000 Interest expense $1,000,000 $100,000 Production cost $3,000,000 Consultant Fees Rent $75,000 lease breaking $50,000 $5,750,000 -$1,750,000 compensation Total expenses $3,425,000 $2,575,000 $5,850,000 Profit (Loss) $4,150,000 With the cost of capital of 12% Solar Inc Solar Inc Budgeted Income Budgeted Income Statement Statement Option 1 Option 2 Year 1-5 Year 1 Year 2-10 Revenue $6,000,000 $4,000,000 $4,000,000 $10,000,000 $10,000,000 Sales Total revenue $6,000,000 Expenses $200,000 $2,000,000 $50,000 $450,000 $2,000,000 $200,000 $700,000 $2,000,000 $100,000 Wages Depreciation Marketing expenses $50,000 $50,000 $3,000,000 Interest expense $1,000,000 $100,000 Production cost $3,000,000 Consultant Fees Rent $75,000 lease breaking $50,000 $5,750,000 -$1,750,000 compensation Total expenses $3,425,000 $2,575,000 $5,850,000 Profit (Loss) $4,150,000 With the cost of capital of 12%

Answer rating: 100% (QA)

acalculation of ARR Average rate of return for option 2 only ARR Average profits Average investment ... View the full answer