10-7. (14 Points) SYP Products, Inc. Comprehensive Problem. Mr. Selph, President of SYP Products Inc., was pleased to hear that he had three offers from large companies for his latest invention. He will use a discount rate of 10 percent to evaluate all of the offers. (Be sure to show all calculations)
|OfferI||$500,000 now plus $125,000 from the end of years 6 through 15. Also, if the product goes over $50 million in cumulative sales by the end of year 15, he will receive an additional $1,400,000. Mr. Selph thinks there is a 75 percent probability this will happen.|
|Offer II||Twenty-five percent of the buyer’s gross margin for the next four years. The buyer’s gross margin is 60 percent. Sales for year 1 are projected to be $1.4 million and then grow by 30 percent per year.|
|Offer III||A trust fund would be set up for the next nine years. At the end of that period, Mr. Selph would receive the proceeds (and discount them back to the present at |
10 percent). The trust fund called for semiannual payments for the next nine years of $82,000. The payments would start immediately. Since the payments are coming at the beginning of each period instead of the end, this is an annuity due. To look up the future value of the annuity due in the tables, add 1 to “n” (18 + 1) and subtract 1 from the value in the table. Assume the annual interest rate on this annuity is 10 percent annually (5 percent semiannually). Determine the present value of the trust fund’s final value. Required: Find the present value of each of the three offers and then indicate which one has the highest present value.
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