negoioting to purchase exclusive rights to manufachurn and market a solar powere
ID: 2620843 • Letter: N
Question
negoioting to purchase exclusive rights to manufachurn and market a solar powered toy car. The cars inventor has offerod Simes the choice of either a one-time paryment of NPV Simes Innovations, Inc., is $1,400,000 today or a series of 5 year-end paryments of $376,000 a rsmes has a oost of capital of 8%, which form of payment should 1h00m? b. What yealy payment would makn the two ofers idensical in value at a cost of e. What would be d The aher tax cash iedows ansooiated with this purchese are projected to amount to $243,750 your answer to part a of this problem ithe yearly payments were made at the beginning of each year? p per ynar fer 16 yers Willthis factor change the fem's deoision abeut how to fund the inital Investment? if Sirnes has a cost of oaptal of 8%, te presert value of the annuity is $? Round to the nearest dolr) a.Explanation / Answer
a) step 1: Calculation of present value of series payment
Present value of Annuity = A*[(1-(1+r)-n)/r]
Where
A - Annuity payment
r - rate per period
n - no. of periods
Present value of Annuity = 375,000*[(1-1.08-5)/.08]
= 375,000*[(1-.6806)/.08]
= 375,000 * 3.9925
= $1,497,187.50
Analysis: Since the present value of series payment is higher than the one time payment, one time payment is preferable.
b) To make the two offers identical, present value of series payment should be $1,400,000
1,400,000 = A*[(1-1.08-5)/.08]
1,400,000 = A * 3.9925
A = 1,400,000 / 3.9925
Annuity Payment = $350,657.48
c) When the payments are made at the begining of each year
Present value of Annuity = A*[(1-(1+r)-n)/r]*(1+r)
= 375,000*[(1-1.08-5)/.08]*1.08
= 375,000 * 3.9925 * 1.08
=$16,16,962.50
Analysis: Since the present value of series payment is higher than the one time payment, one time payment is preferable. So no change in decision
d) Present value of future benefits from the purchase is calculated as
Present value of Annuity = 243,750*[(1-1.08-16)/.08]
= 243,750 * 8.8513
= $2,157,504.38
Analysis: Since the present value of future benefit is higher than the two offers, it does not change the firm's decision about how to fund the initial investment.
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