Question

At the beginning of 2011, market analysts expect Atlantis Company, holder of a valuable patent, to earn the following stream of economic profits over the next five years. At the end of five years, Atlantis will lose its patent protection, and analysts expect economic profit to be zero after five years.

Year Expected Economic Profit 2008 $2,000,000 2009 $3,000,000 2010 $4,000,000 2011 $5,000,000 2012 $2,000,000

a. If investors apply an annual risk-adjusted discount rate of 8 percent, the value of Atlantis Company in 2011 is $______________________, which is also the maximum price they would be willing to pay for Atlantis. b. If investors apply an annual risk-adjusted discount rate of 12 percent, the value of Atlantis Company in 2011 is $______________________, which is also the maximum price they would be willing to pay for Atlantis.