Question

Nike was sued by Adidas for infringing on their patent for running shoes. The CEO of Nike is confident that they will win the case, but the firm is spending $1 million per year on this litigation and it will go on for 4 more years. The interest rate is 5%. Suppose Nike wants to stop dealing with the distraction, how much would Nike have to pay an external firm to take full responsibility of the case? Assume that Nike’s legal department is as equally productive as an outside firm and that the market for outside legal help is perfectly competitive. Also assume that the payment for legal services will be made at the beginning of each year.

Answer 1

As the question described the availability for the nike to run the case ..

there are option for nike whether to run the case on its own or hire a different firm for hiring different firm Niike need to offer a well amount that not only sustain the legal charges but also contributed as the amount covered by the charges of company.

for this decision we need to first calculate the amount required to run the legal charges

for this their is interest rate of 5% and time duration is their but the amount as principal amount will be different each year

Year

Year Deposits

Year Interest

Total Deposits

Total Interest

Balance

1	$1,000,000.00	$26,881.46	$1,000,000.00	$26,881.46	$1,026,881.46
2	$1,000,000.00	$78,225.53	$2,000,000.00	$105,106.99	$2,105,106.99
3	$1,000,000.00	$132,136.81	$3,000,000.00	$237,243.81	$3,237,243.81
4	$1,000,000.00	$188,743.65	$4,000,000.00	$425,987.46	$4,425,987.46

so after calculating the amount by compount interest the amount $4425987.6 we will be occur , so nike need to pay $4425987.6 as basic pay + the expenses bear by different firm

so , for bargaining amount under $5000000 will be sufficient .