Required information As an innovative way to pay for various software packages t

Question

Required information As an innovative way to pay for various software packages that your company sells, a high-tech service company has offered to pay your company in any one of three ways: (1) pay $512,000 now; (2) pay $1.5 million 5 years from now; or (3) pay $200,000 now and $420,000 2 years from now. You want to earn a real return of 11% per year and the inflation rate is 4.5% per year in the specialized software market. Reference links 14.2 Present Worth Calculations Adjusted for Inflation Determine the market return rates at which all three methods have the same PW value. The rate for offer 2 is) The rate for offer 3 is J%.

Explanation / Answer

Option 1 pays 512,000 now and so that it PW is 512,000.
We will have to take this as PW for option 2 and 3.

a) 1500000 / ( 1 + r ) ^ 5 = 512,000
1500000 / 512000 = ( 1+r ) ^ 5
( 2.9296875 ) ^ 1/5 = 1 + r
1.239836 -1 = 0.239836

Required market rate for option 2 is 23.9836%

b) Option 3 has 200000 payment now and 420000 after 2 years.

200000 + ( 420000 / (1+r ) ^ 2 ) = 512000
( 420000 / (1+r ) ^ 2 ) = 312000
420000 / 312000 = (1+r)^2
1.346853 = (1+r)^2
1+r = 1.160238
r = 0.160238

Required market rate should be 16.0238%

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.