In: Accounting
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 $199k 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 $209k 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%).
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 | 209000 | 209000 | |||||||
0.826 | 2 | 540000 | 446280.99 | 2800000 | 1680000.0 | 504000.00 | 416528.926 | 209000 | 209000 | |||||||
0.751 | 3 | 540000 | 405709.99 | 3920000.00 | 2352000.0 | 705600.00 | 530127.724 | 209000 | 209000 | |||||||
0.683 | 4 | 540000 | 368827.27 | 5488000.00 | 3292800.0 | 987840.00 | 674708.012 | 209000 | 209000 | |||||||
0.621 | 5 | 540000 | 335297.51 | TOTAL | 1948637.4 | 209000 | 209000 | |||||||||
0.564 | 6 | 199000 | 112330.31 | 209000 | 209000 | |||||||||||
0.513 | 7 | 199000 | 102118.47 | 209000 | 209000 | |||||||||||
0.467 | 8 | 199000 | 92834.97 | 209000 | 209000 | |||||||||||
0.424 | 9 | 199000 | 84395.43 | TOTAL | 1672000 | 1672000 | ||||||||||
0.386 | 10 | 199000 | 76723.11 | ` | PRESENT VALUE OF PROCEEDS | |||||||||||
0.350 | 11 | 199000 | 69748.29 | COMPOUND PROCEEDS | 3344000 | 1560000.68 | ||||||||||
0.319 | 12 | 199000 | 63407.53 | 3344000*.467 | ||||||||||||
0.290 | 13 | 199000 | 57643.21 | |||||||||||||
0.263 | 14 | 199000 | 52402.92 | |||||||||||||
0.239 | 15 | 199000 | 47639.02 | |||||||||||||
TOTAL SALES | 4690000 | 2806268.11 | ||||||||||||||
LEAST OPTION IS OPTION 3RD | ||||||||||||||||
1 | % DIFFERENCE BETWEEN OFFER 1 TO OFFER 3 | |||||||||||||||
DIFFERENCE AMOUNT | 2806268.11-1560000.68 | |||||||||||||||
1246267.43 | ||||||||||||||||
79.89 | MEANS THERE IS 79.89% MORE RETURN IN OFFER I THAN OFFER III | |||||||||||||||
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have recently developed. A 10% interest rate should be used
throughout this analysis unless otherwise specified:
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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...
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have recently developed. A 10% interest rate should be used
throughout this analysis unless otherwise specified:
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$190k 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
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