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In: Accounting

Consider the following investment offers regarding a product you have recently developed. A 10% interest rate...

Consider the following investment offers regarding a product you have recently developed. A 10% interest rate should be used throughout this analysis unless otherwise specified: Offer (I) – Receive $0.54m now and $193k from year 6 through 15. Also, if your product achieved over $100 million in cumulative sales by the end of year 15, you would receive an additional $3m. Assume that there is a 70% probability this would happen. Offer (II) – Receive 30% of the buyer’s gross profit on the product for the next 4 years. Assume that the buyer’s gross profit margin is 60%. Sales in year 1 are projected to be $2m and then expected to grow by 40% per year. Offer (III) – A trust fund would be set up, calling for semiannual payments of $206k for 8 years. On the 17th period, you would receive the compounded proceeds, which would then be discounted over the 8-year period back to the present at the specified annual rate. Note: The term “k” is used to represent thousands (× $1,000). Required: Determine the percentage difference between your most and least profitable alternatives, with the least profitable option as the basis for your calculation. Answer % Intermediate calculations must be rounded to 3 decimal places (at least). Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Solutions

Expert Solution

OFFER 1 PRESENT VALUE OF 1 @10% YEAR CASH FLOW PRESENT VALUE OF CASH FLOWS OFFER 2 SALES MARGIN 60% PROFIT 30% OF MARGIN (CASH FLOWS) PRESENT VALUE OF CSH FLOWS OFFER 3 HALF YEARLY HALF YEARLY
0.909 1 540000 490909.09 2000000 1200000.0 360000.00 327272.727 206000 206000
0.826 2 540000 446280.99 2800000 1680000.0 504000.00 416528.926 206000 206000
0.751 3 540000 405709.99 3920000.00 2352000.0 705600.00 530127.724 206000 206000
0.683 4 540000 368827.27 5488000.00 3292800.0 987840.00 674708.012 206000 206000
0.621 5 540000 335297.51 TOTAL 1948637.4 206000 206000
0.564 6 193000 108943.47 206000 206000
0.513 7 193000 99039.52 206000 206000
0.467 8 193000 90035.92 206000 206000
0.424 9 193000 81850.84 TOTAL 1648000 1648000
0.386 10 193000 74409.85 ` PRESENT VALUE OF PROCEEDS
0.350 11 193000 67645.32 COMPOUND PROCEEDS 3296000 1537608.33
0.319 12 193000 61495.75 3232000*.467
0.290 13 193000 55905.23
0.263 14 193000 50822.93
0.239 15 193000 46202.67
TOTAL SALES 4630000 2783376.35
LEAST OPTION IS OPTION 3RD
1 % DIFFERENCE BETWEEN OFFER 1 TO OFFER 3
DIFFERENCE AMOUNT 2783376.35-1537608.33
1245768.03
81.02 MEANS THERE IS 81.02% MORE RETURN IN OFFER I THAN OFFER III
2 % DIFFERENCE BETWEEN OFFER 2 TO OFFER 3

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