Question

In: Accounting

Consider the following investment offers regarding a product you have recently developed. A 10% interest rate...

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%).

Solutions

Expert Solution

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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