I need help with B, C, and D. Answer A is already correct if it is needed for ca

Question

I need help with B, C, and D. Answer A is already correct if it is needed for calculations. Thank you

P10-8 (book/static) E Question Help 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 $1,500,000 today or a series of 5 year-end payments of $385,000. a. If Simes has a cost of capital of 9%, 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 996? 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 $250,000 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 9%, the present value of the annuity is $ 1,497,516. (Round to the nearest dollar) Which form of payment should the firm choose? (Select the best answer below) A. Annuity payment B. Lump sum payment b. The yearly payment that would make the two offers identical in value at a cost of capital of 9% is Round to the nearest dollar.

Explanation / Answer

Answer:

A) Present Value of Annual Payment of $ 385,000

= Annual Payments * PV Factor for Ordinary Annuity for 5 years @ 9%

= 385,000 * 3.88965 = $ 1,497,515.25

As the present value annual payments less than the one-time payment, therefore firm should choose annuity payment.

B) Two offers will become identical when the present value of annuity payments will be equal to one time payment i.e. 1,500,000.

PV of Annuity Payments = Annual Payment * PVIF, 5 years @ 9%

Let us assume that annual payment = X

1,500,000 = X * 3.88965

X = 1,500,000 / 3.88965 = $ 385,639

So, yearly payments of $ 385,639 would make the two offers identical.

C) If the yearly payments were made at the beginning of each year, then we will use PV factor for an Annuity Due instead of ordinary annuity.

PV of Annual Payments = Annual Payment * PVIF for annuity due, 5 years @ 9%

= 385,000 * 4.23972 = $ 1,632,292.2

As the present value of of annuity payments is more than one-time payment, therefor firm should opt for onetime payment.

D) As the annual after tax cash inflows from project amounts to $ 250,000. If the firm opts for annuity payments then it will not be able to meet the annual payments from cash inflows of project. Therefore, firm will choose to borrow money from market to make one-time payment for purchase of exclusive rights and schedule the amortization of loan accordingly to its annual cash inflows.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

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