Question
In: Finance
Consider an offer to supply 5 paintings per year to an art gallery in Rome for...
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Consider an offer to supply 5 paintings per year to an art gallery in Rome for the next five years. The contract is exclusive, meaning that, if you accept it, you cannot sell paintings to other galleries or other clients. The contract also offers a signing bonus of $100,000. If you were to refuse the contract, you estimate that you would be selling 7 paintings a year, at a price of $45,000 each, for the next 5 years. Assume that your required rate of return is 20%. What is the minimum price per painting (assume the same price for each painting) at which you are willing to accept the contract?
A. $59,560 B. $39,517 C. $56,312 D. $65,500 E. $41,878
Solutions
Expert Solution
| PV of refusing the offer | ||||||
| Year | Cash flow | PVIF @ 20% | Present value | |||
| 1 | 315000 | 0.833333 | 262,500.00 | |||
| 2 | 315000 | 0.694444 | 218,750.00 | |||
| 3 | 315000 | 0.578704 | 182,291.67 | |||
| 4 | 315000 | 0.482253 | 151,909.72 | |||
| 5 | 315000 | 0.401878 | 126,591.44 | |||
| A | Present value= | 942,042.82 | ||||
| B | PV of sigining bonus = | 100000 | ||||
| C=A-B | Required amount = | 842,042.82 | ||||
| Computation of annual cash flow from offer -Put in caculator | ||||||
| FV | 0 | |||||
| PV | -842042.824 | |||||
| I | 20% | |||||
| N | 5 | |||||
| i | compute PMT | $281,562.03 | ||||
| ii=i/5 | Per painting price = | $56,312 | ||||
| Answer = option B) | $56,312 |
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