Company A owns a patent with 15 years of remaining life. Company B is paying roy

Question

Company A owns a patent with 15 years of remaining life. Company B is paying royalties to Company A for a license to the patent. It is estimated that royalty payments (end-of- year payments) for the next 15 years will be $6,000 per year for the first 5 years, $8,000 per year for the next 4 years, and $10,000 per year for the last 6 years. Company B offers to pre-pay the expected royalty payments for $70,000 now. If Company A considers 10% per year to be its minimum acceptable return on investment, should it accept the pre- payment offer for $70,000 now (time 0) or take the royalty payments year by year?

Explanation / Answer

For the Cash Flow Series
Present Value = $56,961.17

yes they should accept the pre payment

Cash Flow Stream Detail Period Cash Flow Present Value 1 6,000.00 5,454.55 2 6,000.00 4,958.68 3 6,000.00 4,507.89 4 6,000.00 4,098.08 5 6,000.00 3,725.53 6 8,000.00 4,515.79 7 8,000.00 4,105.26 8 8,000.00 3,732.06 9 8,000.00 3,392.78 10 10,000.00 3,855.43 11 10,000.00 3,504.94 12 10,000.00 3,186.31 13 10,000.00 2,896.64 14 10,000.00 2,633.31 15 10,000.00 2,393.92 Total: 56,961.17

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