Question

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 $0.51m 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 $208k 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 1

Offer 1
Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Amount	5,10,000						1,99,000	1,99,000	1,99,000	1,99,000	1,99,000	1,99,000	1,99,000	1,99,000	1,99,000	22,99,000
PVF @ 10%	1	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665	0.4241	0.3855	0.3505	0.3186	0.2897	0.2633	0.2394
Present Value	5,10,000	-	-	-	-	-	1,12,330	1,02,118	92,835	84,395	76,723	69,748	63,408	57,643	52,403	5,50,362
Total Present Value	17,71,967