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 $0.55m now and $196k 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 $202k 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

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	510000	463636.36			2000000	1200000.0	360000.00	327272.727			202000	202000
0.826	2	510000	421487.60			2800000	1680000.0	504000.00	416528.926			202000	202000
0.751	3	510000	383170.55			3920000.00	2352000.0	705600.00	530127.724			202000	202000
0.683	4	510000	348336.86			5488000.00	3292800.0	987840.00	674708.012			202000	202000
0.621	5	510000	316669.87					TOTAL	1948637.4			202000	202000
0.564	6	196000	110636.89									202000	202000
0.513	7	196000	100578.99									202000	202000
0.467	8	196000	91435.45									202000	202000
0.424	9	196000	83123.13								TOTAL	1616000	1616000
0.386	10	196000	75566.48									`		PRESENT VALUE OF PROCEEDS
0.350	11	196000	68696.80									COMPOUND PROCEEDS	3232000	1507751.85
0.319	12	196000	62451.64										3232000*.467
0.290	13	196000	56774.22
0.263	14	196000	51612.93
0.239	15	196000	46920.84
	TOTAL SALES	4510000	2681098.63
	LEAST OPTION IS OPTION 3RD
1	% DIFFERENCE BETWEEN OFFER 1 TO OFFER 3
	DIFFERENCE AMOUNT	2681098.63-1507751.85
			1173346.78
			77.82	MEANS THERE IS 77.82% MORE RETURN IN OFFER I THAN OFFER III
2	% DIFFERENCE BETWEEN OFFER 2 TO OFFER 3
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