Simes Innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar- powered toy car. The car's inventor has offered Simes the choice of either a one-time payment of $1,500,000 today or a series of five year-end payments of $385,000. a. If Simes has a cost of capital of 9%, which form of payment should it choose? b. What yearly payment would make the two offers identical in value at a cost of capital of 9%? c. Would your answer to part a of this problem be different if the yearly payments were made at the beginning of each year? Show what difference, if any, that change in timing would make to the present value calculation.
Simes Innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar- powered toy car. The car's inventor has offered Simes the choice of either a one-time payment of $1,500,000 today or a series of five year-end payments of $385,000. a. If Simes has a cost of capital of 9%, which form of payment should it choose? b. What yearly payment would make the two offers identical in value at a cost of capital of 9%? c. Would your answer to part a of this problem be different if the yearly payments were made at the beginning of each year? Show what difference, if any, that change in timing would make to the present value calculation.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Simes Innovations, Inc., is negotiating to purchase
exclusive rights to manufacture and market a solar-
powered toy car. The car's inventor has offered Simes
the choice of either a one-time payment of $1,500,000
today or a series of five year-end payments of
$385,000.
a. If Simes has a cost of capital of 9%, which form of
payment should it choose?
b. What yearly payment would make the two offers
identical in value at a cost of capital of 9%?
c. Would your answer to part a of this problem be
different if the yearly payments were made at the
beginning of each year? Show what difference, if any,
that change in timing would make to the present
value calculation.
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