Question

Nadine Chelesvig has patented her invention. She is offering a potential manufacturer two contracts for the exclusive right to manufacture and market her product. Plan A calls for an immediate single lump sum payment to her of $300,000. Plan B calls for an annual payment of $24,000 plus a royalty of $4.80 per unit sold. The remaining life of the patent is 10 years. Nadine uses a MARR of 10%/year. What must be the uniform annual sales volume of the product for Nadine to be indifferent between the contracts, based on an annual worth analysis? units

Answer 1

Let required quantity be Q per year. Then,

AW of Plan A = AW of Plan B

300,000 x A/P(10%, 10) = 24,000 + 4.8Q

300,000 x 0.1627** = 24,000 + 4.8Q

48,810 = 24,000 + 4.8Q

4.8Q = 24,810

Q = 5,168.75 ~ 5,169 units

**From A/P factor table