Scor-eStore.com was simply the experiments of two penniless entrepreneurs Mark Burgess and Chris Madsen. If successful, customers could play and deliver sheet music over the Web. A composer could even create the music by playing it on an electronic instrument keyboard. Besides, Scor-eStore.com would offer more other functions. However, to bring it to a company, it needed an initial investment of $90,000. If possible, Lance Bernard, the potential venture capitalist, would pay the whole $90,000 and acquire the 1/3 of the company. Basically, they would spend four months to develop prototype of the viewer, and then operate website pilot in the next two months. They would launch and run business for another six months until when they decide to either expand or not and continue to run business for six more months. At the end of 18 months, Bernard would definitely sell his interests.
According to the case, Bernard’s value of original opportunity was $68.465K. Subtracted by the initial investment of $90K, the NPV was $21.535K. Thus, he planned to pass the opportunity. But his friends offered him alternatives which may generate positive outcomes to the project. With no options to either expand or buyout or both, if the viewer would be functional and website would be a winner, Bernard could make NPV= $366.44K by selling the business in six months. If the viewer were competitively functional in four months, but the website failed, Bernard would abandon the Web business and sell technology. He would add $25,000 of his money to turn the viewer into a shrink-wrapped software product. The selling price would be $450K and he would get a third of that. After being discounted to present, NPV would be $24.11K. He would have to sell the web business if the viewer was not functional and the website was successful. Bernard could get a third of the selling price of $300K which equaled $100K in six months. The NPV would be $1.29K. If both fail, eh would lose $90K in total. We’ve...
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