Question

You are evaluating a s project that develops AI cars. You dont have firm-level data,. For this project, you will need take a top-down valuation approach.
• The revenue of the transportation market is $50 billion dollars in the year of 2019. Its growth rate in 2020 is -5, in 2021 it is 3%, and goes 0%, 0%, 1%, 1%, 2%,2%,2%,2%,2% which ends in 2030.
• The current revenue share of the AI industry in the transportation market is 0%. The revenue share will rise in the year of 2025. It will then stabilize to 40% in the year of 2030.
• 10% is the discount rate in the industry

a. You use linear interpolation to estimate the AI car industry’s revenue share between 2025 to 2030. In 2024 the market share is 0; in 2030, the market share is 40%. From 2025 to 2030 (including 2025 and 2030), the increase in the revenue share relative to the previous year is a constant. What is the AI car industry’s market share as of 2029?
b. What is the AI car industry’s total revenue in 2030?
c. What is the present value of the AI car industry’s total revenue from 2020 to 2030? Discount all cash flows back to the year of 2019 (in billions $)?

Answer 1

Revenue for transportation market is $50 bn

Discount rate of the industry=10%

By linear interpolation and considering that till 2024 the market share percentage of AI cars is zero:

taking 2025 as 0%

and in 2030 it stabilizes at 40%

then it becomes and arithmatic progression with a=0 and a+(7-1)*d(constatnt)=40%

Therefore the after solvinf the costant comes out to be d=6.667%

therefore from 2025 to 2030 the % will look like 6.667%(2025),13.33%(2026),20%(2027),26.667%(2028),33.33%(2029),40%(2030)

Now coming to the qustion of AI cares market share in 2029: which is 33.33% as calculated above:

b) For this we will calculate the total market from 2020 to 2030 from the percentage growth given:

From calculation the total market revenue in year 2029 comes out to be $54.02 bn , therefore market dhare AI cars will be: 33.33% 0f $54.02=$18 Bn

c) NPV of all cash flows of reveues from 2020-2030 to present 2019:

NPV=2020 to 2024 we have zero cash flows+6.667%*49.91/(1.1)^6+13.33%*50.91/1.1^7+20%*51.92/1.1^8+52.96*26.67%/1.1^9+54.02*33.33%/1.1^10+55.10*40%/1.1^11

NPV=$30.863 Bn