Question

NPV Simes Innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The car's inventor has offered Simes the choice of either a one-time payment of $1,200,000 today or a series of 5 year-end payments of $350,000 a. If Simes has a cost of capital of 12%, which form of payment should it choose? b. What yearly payment would make the two offers identical in value at a cost of capital of 12%? c. What would be your answer to part a of this problem if the yearly payments were made at the beginning of each year? d. The after-tax cash inflows associated with this purchase are projected to amount to $227,500 per year for 15 years. Will this factor change the firm's decision about how to fund the initital investment? a. If Simes has a cost of capital of 12%, the present value of the annuity is $ (Round to the nearest dollar.) Which form of payment should the firm choose? (Select the best answer below.) O A. Lump sum payment O B. Annuity payment b. The yearly payment that would make the two offers identical in value at a cost of capital of 12% is $ . (Round to the nearest dollar.) c. If the yearly payments were made at the beginning of each year, the present value of the annuity is $ (Round to the nearest dollar.) Which form of payment should the firm choose if the annuity payments are paid at the beginning of each year? (Select the best answer below.) O A. Annuity payment O B. Lump sum payment d. The after-tax cash inflows associated with this purchase are projected to amount to $227,500 per year for 15 years. Will this factor change the firm's decision about how to fund the initital investment? (Select the best answer below.) O A. No, the cash flows from the project will not influence the decision on how to fund the project. The investment and financing decisions are separate O B. Yes, the cash flows from the project will influence the decision on how to fund the project. The investment and financing decisions are related.

Answer 1

Calculate the present value as follows:

$1,200,000 $1,261,672 139 140 a 141 142 b 143 c 144 145 d Lump sum payment Present value of annuity Choose lump sum Equal yearly payments for two option Present value of annuity Choose annuity payment Option A. $332,892 $1,190,641

Formulas:

C 1200000 =PV(12%,5,-350000) 139 140 a 141 142 b 143 C 144 145 d В Lump sum payment Present value of annuity Choose lump sum Equal yearly payments for two option Present value of annuity Choose annuity payment Option A. =PMT(12%,5.-1200000) =PV(12%,4,-350000,,1)