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 $0.56m now and $198k 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 $2.1m 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 % 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 CASH FLOWS		OFFER 3	HALF YEARLY	HALF YEARLY
	0.909	1	560000	509090.909			2100000	1260000.0	378000.00	343636.364			208000	208000
	0.826	2	560000	462809.917			2940000	1764000.0	529200.00	437355.372			208000	208000
	0.751	3	560000	420736.289			4116000.00	2469600.0	740880.00	556634.110			208000	208000
	0.683	4	560000	382487.535			5762400.00	3457440.0	########	708443.412			208000	208000
	0.621	5	560000	347715.941					TOTAL	2046069.3			208000	208000
	0.564	6	198000	111765.838									208000	208000
	0.513	7	198000	101605.307									208000	208000
	0.467	8	198000	92368.461									208000	208000
	0.424	9	198000	83971.328								TOTAL	1664000	1664000
	0.386	10	198000	76337.571									`		PRESENT VALUE OF PROCEEDS
	0.350	11	198000	69397.792									COMPOUND PROCEEDS	3328000	1552536.56
	0.319	12	198000	63088.902										3328000*.467
	0.290	13	198000	57353.547
	0.263	14	198000	52139.588
	0.239	15	198000	47399.626
	TOTAL SALES	4780000	2878268.55
		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	2878268.55-1552536.56
				1325731.99
			% DIFF	85.39	MEANS THERE IS 85.39% MORE RETURN IN OFFER I THAN OFFER III
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