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Simes Innovations, Inc- Pay today or pay in installments

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 5 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 offers identical in value at a cost of capital of 9%?
c. Would your answer to part A of this problem be different in the yearly payments were made at the beginning of each year? Show what different, if any, that change in timing would make to the present value calculation.
d. The after-tax cash inflows associated with this purchase are projected to amount tp $250,000 per year for 15 years. Will this factor change the firm's decision about how to fund the initial investment?

Solution Summary

Simes Innovations, Inc- Pay today or pay in installments
Lump sum payment or yearly payment

$2.19