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 $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 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 $1.9m and then expected to grow by 40% per year.

Offer (III) – A trust fund would be set up, calling for semiannual payments of $210k 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.

______% 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%).

Answer 1

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	510000	463636.364			1900000	1140000.0	342000.00	310909.091			210000	210000
	0.826	2	510000	421487.603			2660000	1596000.0	478800.00	395702.479			210000	210000
	0.751	3	510000	383170.548			3724000.00	2234400.0	670320.00	503621.337			210000	210000
	0.683	4	510000	348336.862			5213600.00	3128160.0	938448.00	640972.611			210000	210000
	0.621	5	510000	316669.875					TOTAL	1851205.5			210000	210000
	0.564	6	190000	107250.047									210000	210000
	0.513	7	190000	97500.042									210000	210000
	0.467	8	190000	88636.402									210000	210000
	0.424	9	190000	80578.547								TOTAL	1680000	1680000
	0.386	10	190000	73253.225									`		PRESENT VALUE OF PROCEEDS
	0.350	11	190000	66593.841									COMPOUND PROCEEDS	3360000	1567464.80
	0.319	12	190000	60539.855										3360000*.467
	0.290	13	190000	55036.232
	0.263	14	190000	50032.938
	0.239	15	190000	45484.489
	TOTAL SALES	4450000	2658206.87
		THE LEAST PROFITABLE OPTION IS OFFER III
		AND THE MOST PROFITABLE OPTION IS OFFER I
	1	% DIFFERENCE BETWEEN OFFER 1 TO OFFER 3
		DIFFERENCE AMOUNT	2658206.87-1567464.8
				1090742.07
			% DIFF	69.59	MEANS THERE IS 69.59% MORE RETURN IN OFFER I THAN OFFER III
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