Whiteoak manufactures propellers for the shipbuilding industry. In 2010, the company began working on a new prototype of its tried-and tested propellers. The old model propellers required the use of parts that would wear out over time and require servicing. When the engineers in Whiteoak initiated the design of a new propellers in 2013, they explored a number of possible designs and spent over $150,000 in fabricating and testing a new design before perfecting the system that they are now are ready to place into production and begin marketing. To manufacture the new propellers, Whiteoak will have to spend $750,000 on new equipment plus $300,000 in advertising and promotion for the launch of the new product. These expenditure will take place during 2013.

(a) What is the relevant initial cost of the new propellers product investment?

(b) Whiteoak’s management expects to sell 1,500 of the new units per year for the next 15 years and these units will produce free cash flow for Whiteoak of $150,000 per year. Furthermore, the company’s management estimates that the equipment purchased initially will last for the full 15 years, at which time it will have no salvage value. If the company uses a 10 percent rate of return to evaluate its investments, what is the NPV of the new propellers investment?

(c) Just as Whiteoak’s management was about to launch the new investment, the company’s owner received a call from Yamane inquiring about the possible purchase of the product design patent. Yamane suggested that it would be interested in paying as much as $110,000 for the exclusive rights to the new technology. Whiteoak would have to sign over all its rights to the new design in return for the payment. How should this offer influence Whiteoak’s decision to initiate manufacturing the new windmill design?