The AveiroTech, Inc. is a holding company. Today, AveiroTech is studying a takeover bid on SvalbardTech, a biotech company. The takeover requires an initial investment of 3.5 million euros and has an expected free cash flow of 1.75 million euros per year, until 2023. Afterwards, the current technology (with a code name “cod_1”) will be outdated and obsolete. The SvalbardTech has a plan to invest 8.5 million euros in year 2023 in an evolution of the current technology (code name “cod_2”). The AveiroTech managing board is also evaluating this plan plan's viability. The chief investment officer forecasts cod_2 free cash flows’ present value to be 7 million euros, in 2023. Because SvalbardTech operates in a risky environment the chief risk officer estimates a risk of 33% per year for these free cash flows. The interest rate is 8.00% a year.

a.Suppose that the AveiroTech, Inc. goes ahead with the takeover on SvalbardTech. What is the maximum value to bid for SvalbardTech?

b)Assume the chief risk officer reassess the cod_2 free cash flows’ risk at 13% per year. Should Aerotech change its decision? Explain.