Nadine Chelesvig has patented her invention. She is offering a patent manufactur
ID: 2638458 • Letter: N
Question
Nadine Chelesvig has patented her invention. She is offering a patent manufacturer two contracts for the exclusive right to manufacture and market her product. Plan A calls for an immediate single lump payment to her of $35,000. Plan B calls for an annual payment of $1,200 plus a royalty of $0.40 per unit sold. The remaining life of the patent is 10 years. Nadine uses a MARR of 7 %/year.
a. What must be the uniform annual sales volume of the product for Nadine to be indifferent between the contracts, based on a present worth analysis?
b. If the sales volume is below the volume determined in (a), which contract would the manufacturer prefer?
Explanation / Answer
a) Lumpsum payment $35,000 Let units sold be X Statemnet showing Cash flows Particulars Time PV Amount PV Annual Payment 1 0.934579 1200+.40 X Annual Payment 2 0.873439 1200+.40 X Annual Payment 3 0.816298 1200+.40 X Annual Payment 4 0.762895 1200+.40 X Annual Payment 5 0.712986 1200+.40 X Annual Payment 6 0.666342 1200+.40 X Annual Payment 7 0.62275 1200+.40 X Annual Payment 8 0.582009 1200+.40 X Annual Payment 9 0.543934 1200+.40 X Annual Payment 10 0.508349 1200+.40 X PV of Annual Payments 7.023582 1200+.4X 35000= 7.023582(1200+.4X) 35000= 8428.30+2.81X 2.81X=26571.70 X=9458 Units per year to be sold
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