Question
1. 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
a. If Simes has a cost of capital of 9%, which form of payment should the company 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.
d. The after-tax cash inflows associated with this purchase are projected to amount to $250,000 per year for 15 years. Will this factor change the firms decision about how to fund the initial investment?
Year (t) Cash inflows (CFt)
a. Calculate the payback period for the proposed investment.
b. Calculate the net present value (NPV) for the proposed investment.
Cash flows Project A Project B Project C
Initial investment (CF0) $60,000$100,000 $110,000
Cash inflows (CFt),t1 to 5 $20,000 $ 31,500 $ 32,50
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