I am considering an investment in cost-reduction technology. There are two competing solutions, and I know one of them will prevail. Right now, each looks equally likely to succeed. I have no skills at all in either of these two technologies. It is estimated that 5 years from now, one of the two technologies will prevail and will result in cost reductions that will yield $1 billion of extra net operating profit after tax (NOPAT), which is expected to grow at 2% per year forever.
What is the most I should be willing to pay today in order to have the option to adopt one of these two technologies in the future?
Assume my WACC is 8% and my tax rate does not matter since I gave you the NOPAT number above. Consider: the value of C dollars per year growing at X% forever = C/(r–x), where r is the expected return on the money.