You work at a Software as a Service (SaaS) company that has a suite of software programs to help businesses operate more efficiently

You work at a Software as a Service (SaaS) company that has a suite of software programs to help businesses operate more efficiently. Many of the company’s clients are asking for a new type of solution that would be a natural addition to the company’s suite of SaaS products.

There is a startup that specializes in this product and they are already selling to the target market. As a result, your organization has three options:

1.Build a similar product in-house
2.Buy the startup
3.Do nothing

You explore how much it would cost to build a similar product with your own technology team and you work with the sales team to understand the revenue potential if you brought the product to market. You come up with the following projections:
It would cost $3M to build the solution in-house and it could be ready to go-to-market quickly–at the same time as an acquisition could be done.
Since the new solution would be competing with the startup, revenues would be less than the startup’s current revenues: $1M in Year 1, growing by $100K each year through Year 5, after which it would stabilize at grow at 2% per year in perpetuity.
Ongoing costs (after the $3M investment) to service the solution and provide routine enhancements would be 40% of revenues.
In addition, you approach the CEO of the startup, and they are willing to sell. You develop the following projections:
It will cost $10M to buy the entire company.
Revenues would be $2M in Year 1 and increase $150K each year through Year 5, after which it would stabilize and grow 2% per year in perpetuity.
Ongoing costs (after the acquisition cost) to service the product and provide routine enhancements would be 45% of revenues.
The CFO of your company has told you to use a 10% cost of capital for each scenario.

For both the build and buy options, calculate the following: (20 Points)
the Present Value (PV) of the future cash flows
the Net Present Value (NPV) of the entire scenario
the five-year ROI of the investment
the five-year Internal Rate of Return
In light of your answers to question #1, what is your recommendation—build in-house, buy the startup, or do nothing? Provide data points to support your recommendation and explain your rationale for using PV, NPV, 5-year ROI, or 5-year IRR as a metric. (10 Points)
If the in-house build were delayed by one year, would this change your recommendation? If yes, how so? (10 Points)
What is the highest price your company should be willing to pay for the startup in light of the in-house option? (Round to the nearest increment of $100,000.) (10 Points)
Your manager asks you to identify risks/dangers to pursuing each of the three options (build in-house, buy the startup, or do nothing) as well as mitigation plans. Provide at least two risks for each of these decisions as well as some proposals of how you might mitigate those risks. (20 Points)
The CEO of the startup calls you and presents a new option: you can buy 50% of the company for $4M and go to market as a joint venture. All revenue and cost projections for the startup remain the same, but you’ll only get to keep 50% of the revenues from this joint venture. Does this change your recommendation? Provide data points to support your answer. (10 Points)
After speaking with the sales and strategy teams, they believe that beginning in Year 6, there will be diminishing demand for this product due to other technological advances, and revenue will begin to decline 15% each year in perpetuity. Also, your technology team now suggests that the cost to build the product in-house in the required time frame will cost $4.5M instead of $3M. Which option (build in-house, buy the startup, or do nothing) would you recommend because of these new assumptions? Provide data points to support the recommendation. (10 Points)
If the cost of capital (discount rate) changed to 8%, would this change your recommendation? If so, how? (10 Points)

Point values for each question are stated above. Each question will be evaluated based on the following criteria:
Your understanding of the uses of balance sheet and income statement metrics and ratios.
Your ability to derive insights from the data provided.
The clarity of your logic, and the accuracy of your answers.