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 $0.54m now and $193k 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 $206k 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

Offer 2

Offer 3

Particulars	Amount	Profitability
Option 1 Present value	$1,779,075	Least
Option II Present value	$1,948,637.39
Option III Present value	$2,273,497.27	Highest

Find the percentage between least and highest as follows

Percentage = ( 2273497.27-1779075)/1779075

= $ 494422.44/$ 1779075*100

= 27.7909

Percentage difference is 27.79 or 27.80%.

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