Simes Innovations, Inc., is negotiating to purchase exclusive rights to manu- fa

Question

Simes Innovations, Inc., is negotiating to purchase exclusive rights to manu- facture and market a solar-powered toy car. The car’s inventor has offered Simes the choice of either a one-time payment of $2,200,000 today or a series of nine year-end payments of $360,000.

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 9%?

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 $234,000 per year for 16 years. Will this factor change the firm's decision about how to fund the initial investment. What form of payment should the firm choose if the annuity payments are paid at the beginning of each year?

Explanation / Answer

a) PV of annuity of 360000 for 9-years with CoC 9% =360000*PVA(n=9,i=9%)=360000*5.5592 2001312 Since 20013122200000, it is a good idea to pay 2200000 in one go. d) PV of the annuity=234000*PVA(N=16,i=9%)=234000*8.3126 1945148 Since the inflow 1945148 is

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