Question

8. Suppose you own a business and will receive royalties of $18,500 per year for the next 25 years as a result of a product you invented. If a discount rate of 8% is applied, should you be willing to sell the future rights today for $250,000?

Answer 1

Solution :

The present value of receipt of $ 18,500 per year for 25 years at 8 % discount rate = $ 197,483.36

The amount received today = $ 250,000

Since the Present value of cash flows over a period of 25 years is less than $ 250,000 that can be received today, the future rights should be sold today.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

14.04.2019 - Excel HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW Statement showing Calculation of present value of annual Royalty receipts for 25 years Cash Inflow Sl.No. Year Nature of cash flow Discounted Cash Flow 11Annual Royalty receipt Year1 $ 22 Annual Royalty receipt Year 2 $ 3 3 Annual Royalty receipt Year 3 $ 4 4Annual Royalty receipt Year 4 $ 5 5Annual Royalty receipt Year5 $ 6 6 Annual Royalty receipt Year 6$ 7 7Annual Royalty receipt Year 7 $ 8 8 Annual Royalty receipt Year 8 $ 9 9 Annual Royalty receipt Year9 $ 10 10Annual Royalty receipt Year 10 $ 11 11 Annual Royalty receipt Year 11 $ 12 12 Annual Royalty receipt Year 12 $ 13 13 Annual Royalty receipt Year 13 $ 14 14Annual Royalty receipt Year 14 $ 15 15 Annual Royalty receipt Year 15 $ 16 16Annual Royalty receipt Year 16 $ 17 17 Annual Royalty receipt Year 17 $ 18 18Annual Royalty receipt Year 18 $ 19 19 Annual Royalty receipt Year 19 $ 20 20Annual Royalty receipt Year 20 $ 21 21 Annual Royalty receipt Year 21$ 22 22 Annual Royalty receipt Year 22 $ 23 23 Annual Royalty receipt Year 23$ 24 24 Annual Royalty receipt Year 24 $ 25 25 Annual Royalty receipt Year 25$ 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 0.9259 $ 0.8573 $ 0.7938 $ 0.7350 $ 0.6806 0.6302 $ 0.5835 $ 0.5403 0.5002 $ 0.4632 $ 0.4289 $ 0.3971 $ 0.3677 $ 0.3405 0.3152 $ 0.2919 $ 0.2703 $ 0.2502 $ 0.2317 $ 17,129.63 15,860.77 14,685.90 13,598.05 12,590.79 11,658.14 10,794.57 9,994.97 9,254.61 8,569.08 7,934.33 7,346.60 6,802.41 6,298.53 5,831.97 5,399.97 4,999.98 4,629.61 12 13 15 20 21 3,969.14 3,675.13 3,402.90 3,150.83 23 0.1987 $ 0.1839 $ 0.1460 $ 28 29 30 2,701.33 197,483.36 Present value of Royalty receipts today SUM(G4:G28) Sheet? Sheet5