Question

P10-8 (similar to) Question Help NPV Simes Innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy ca The car's inventor has offered Simes the choice of either a one-time payment of $2,400,000 today or a series of 9 year-end payments of $375,000 a. If Simes has a cost of capital of 14%, 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 14%? 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 $243,750 per year for 15 years. Will this factor change the firm's decision about how to fund the initital investment?

Answer 1

One time payment , PV = $ 2,400,000

Series of payments, PMT = $ 375,000

Number of years, nper = 9

Cost of capital, rate = 14%

a)

PV of series of payments, PV =
=pv(14%,9,375000 PV(rate, nper, pmt, [fv], [type])
= $ 1,854,889.44

So he must choose Option 2 as it has lower PV.

b)

PV of the first payment = 2,400,000

Yearly payment (PMT) =
=pmt(14%,9,2400000 PMT(rate, nper, pv, [fv], [type])
= $ 485,204. 12

c)

PV of series of payments, PV =
=PV(14%,9,375000,,1) PV(rate, nper, pmt, [fv], [type])
= $ 2,114,573.96

Series payments will still be chosen as it has lower PV.