FINA2230 BUSINESS FINANCE WINTER 2017 Homework Chapter 10 Sc

FINA2230 BUSINESS FINANCE WINTER 2017 Homework: Chapter 10 Score: 0 of 1 pt P10-8 (similar to) Save HW Score: 19.87%, 2.58. Question Help * 4 of 13(3 complete) NPV Simes Innovations, Inc, is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The cars inventor has offered Simes the $1,600,000 today or a series of 6 year-end payments of $380,000. a. If Simes has a cost of capital of 11%, 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 11%? c. What would be your answer to part a of this problem if the yearly payments were made at the beginning of each year? d. The after-tax cash inflows associated with this purchase are projected to amount to $247000 per year for 16 years. Will this factor change the firm\'s decision about how to fund the initital investment? (Round to the nearest a. If Simes has a cost of capital of 11% the present value of the annuity is S dollar.) Enter your answer in the answer box and then click Check Answer emaining 9:41 PM

Solution

Answer a.

Option 1:

One-time Payment = $1,600,000

Option 2:

Annual Payment = $380,000
Number of payments = 6
Cost of Capital = 11%

Present Value of Payments = $380,000 * PVIFA(11%, 6)
Present Value of Payments = $380,000 * (1 - (1/1.11)^6) / 0.11
Present Value of Payments = $1,607,604

Considering above calculation, Option 1 should be selected.

Answer b.

Present Value of Option 1 = Present Value of Option 2
$1,600,000 = Annual Payment * PVIFA(11%, 6)
$1,600,000 = Annual Payment * 4.23054
Annual Payment = $378,202

So, annual payment of $378,202 will make both options indifferent.

Answer c.

Option 1:

One-time Payment = $1,600,000

Option 2:

Annual Payment = $380,000
Number of payments = 6
Cost of Capital = 11%

Present Value of Payments = $380,000 * 1.11 * (1 - (1/1.11)^6) / 0.11
Present Value of Payments = $1,784,441

Considering above calculation, Option 1 should be selected.

Answer d.

Annual Cash inflows = $247,000
Period of cash inflows = 16 years

Present Value of Cash Inflows = $247,000 * PVIFA(11%, 16)
Present Value of Cash Inflows = $247,000 * (1 - (1/1.11)^16) / 0.11
Present Value of Cash Inflows = $1,822,653

Considering this factor, both options can be use but option 1 is more economical.