Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 14

Dow Chemical is considering licensing a low liquid discharge (LLD) water treatment system from a small company that developed the process. Dow can purchase a 1-year option for $150,000 that will give it time to pilot-test the LLD process, or Dow can acquire the license now at a cost of $1.8 million plus 25% of sales. If Dow waits 1 year, the cost will increase to $1.9 million plus 30% of sales. If Dow projects the sales to be $1,000,000 per year over the 5-year license period, should the company license the process now or purchase the option to license it after the 1-year test period Assume the MARR is 15% per year.