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# Medical Research Corporation

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Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the responses he had received from drug companies for his latest discovery, a unique electronic stimulator that reduces the pain from arthritis. The process had yet to pass regoros Federal Drug Administration (FDA) testing and was still in the early stages of development, but the interest was intense. He received the three offers described below this paragraph. (A 10 percent interest rate should be used throughout this analysis unless otherwise specified.)
(Comprehensive time vaule of money)
Offer I \$1,000,000 now plus \$200,000 from year 6 through 15. Also if the product did over \$100 million in cumulative sales by the end of year 15, he would receive an additional \$3,000,000. Dr. Wolf thought there was a 70 percent probability this would happen.

Offer II Thirty percent of the buyer's gross profit on the product for the next four years. The buyer in this case was Zbay's gross profit margin was 60 percent. Sales in year one were projected to be \$2 million and then expected to grow by 40 percent per year.

Offer III A trust fund would be set up for the next 8 years. At the end of that period, Dr. Wolf would receive receive the proceeds (and discounts them back to the present at 20 percent). The trust fund called for semianual payments for the next 8 years of \$200,000 (a total of \$400,000 per year).

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 an annuity due in the tables, add 1 to n (16 + 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 indicate which one has the highest present value.

#### Solution Preview

Offer I

\$1,000,000 now plus:
+ \$200,000 from year 6 through 15 (deferred annuity)

We fist calculate the PV of the annuity at the end of year 5. The total years in the annuity are 10
PVA = A x PVIFA (10%, 10 years)
= \$200,000 x 6.145
= \$1,229,000 (percent value at the beginning of
year 6, i.e. the end of year 5)

we convert this amount to PV today
PV = FV x PVIF (10%, 5 years)
= \$1,229,000 x .621
= ...

#### Solution Summary

The solution explains how to calculate the present value of each of the three offers and determine the best offer

\$2.49