Simes Innovations, Inc., is negotiating to purchase exclusive rights to manu- facture and market a solar-powered...

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Simes Innovations, Inc., is negotiating to purchase exclusiverights to manu- facture and market a solar-powered toy car. Thecar’s inventor has offered Simes the choice of either a one-timepayment of $1,500,000 today or a series of five year-end paymentsof $385,000. a) If Simes has a cost of capital of 9%, which form ofpayment should it choose? ? b) What yearly payment would make thetwo offers identical in value at a cost of capital of 9%? ? c)Would your answer to part a of this problem be different if theyearly payments were made at the beginning of each year? Show whatdifference, if any, that ?change in timing would make to thepresent value calculation. ? d)Theafter-taxcashinflowsassociatedwiththispurchaseareprojectedtoamountto $250,000 per year for 15 years. Will this factor change thefirm’s decision about how to fund the initial investment? ?

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Answer a Calculation of present value of yearly payments of 385000 using 9 cost of capital as discount rate We can use the present value of annuity formula to calculate this value Present Value of annuity P x 1 1rnr P annual payment 385000 r cost of capital 9 n number of annual payments 5 Present Value of annuity 385000 x 1 10095009 Present Value of annuity 385000 x 3889651 Present Value See Answer

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Simes Innovations, Inc., is negotiating to purchase exclusiverights to manu- facture and market a solar-powered toy car. Thecar’s inventor has offered Simes the choice of either a one-timepayment of $1,500,000 today or a series of five year-end paymentsof $385,000. a) If Simes has a cost of capital of 9%, which form ofpayment should it choose? ? b) What yearly payment would make thetwo offers identical in value at a cost of capital of 9%? ? c)Would your answer to part a of this problem be different if theyearly payments were made at the beginning of each year? Show whatdifference, if any, that ?change in timing would make to thepresent value calculation. ? d)Theafter-taxcashinflowsassociatedwiththispurchaseareprojectedtoamountto $250,000 per year for 15 years. Will this factor change thefirm’s decision about how to fund the initial investment? ?