how sensitive is this value estimate to the variance in project cash flows what broa 546369

Cyclops Inc, a high technology company specializing in state-of-the-art visual technology, is considering going public. While the company has no revenues or profits yet on its products, it has a ten-year patent to a product that will enable contact lens users to get no-maintenance lens that will last for years. While the product is technically viable, it is exorbitantly expensive to manufacture and the potential market for it will be relatively small initially. (A cash flow analysis of the project suggests that the present value of the cash inflows on the project, if adopted now, would be $250 million, while the cost of the project will be $500 million.) The technology is rapidly evolving and a simulation of alternative scenarios yields a wide range of present values, with an annualized standard deviation of 60%. To move towards this adoption, the company will have to continue to invest $10 million a year in research. The ten-year bond rate is 6%.

a. Estimate the value of this company.

b. How sensitive is this value estimate to the variance in project cash flows? What broader lessons would you draw from this analysis?