NPVSimes Innovations, Inc., is negotiating to purchase exclusive rights to manuf

Question

NPVSimes 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 $2,000,000 today or a series of 7 year-end payments of $375,000.

a.If Simes has a cost of capital of 13%, 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 13%?

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 16 years. Will this factor change the firm's decision about how to fund the initital investment?

Explanation / Answer

1. The Cashflows would be as follows

=

The present value of these cashflows would be as at 13%

= 375000/(1.13) ................................+ 375000/(1.13)^7

=1658478.91

As the present value is less than 2,000,0000 then the he should choose payments of annual 375000

2) That can be calculates in excel .It would be annuity whose present value is 2000000

=PMT(0.13,7,2000000,0,0) = 452221.61

3)If the payments are made at the beginnig of year then the prsent value of the payments would be

= 1874081 , therefore it would be still a teer choice to to choose annul payments

4) Yes it would have an impact because then we should calclate the present value of the cahsflows which would be

PV(0.13,16,243750,0,0)= 1609694.55

which would be less than present value of outflows hence then he should not fund investment

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