Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response 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 rigorous 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.)

Offer I $1,000,000 now plus $200,000 a year 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 buyers gross profit on the product for the next four years. The buyer in this case was Zbay Pharmaceutical. Zbays 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. The trust fund called for semiannual payments for the next 8 years of $200,000 (a total of $400,000 per year). The payments would start immediately. Assume the annual interest rate on this annuity is 10 percent annually (5 percent semiannually). Determine the present value of the trust.

Which offer would you advise Dr. Wolf to take?

Required:

You should calculate each offer's present value(the value of the offer today) and compare them, not future values.

Please submit an MS Excel file with your calculations embedded in the Excel Cells as formulas OR provide an MS Word document with the solutions and a detailed description of how you calculated your answers.

The way you present your project matters. You are permitted to turn in either a typed or a hand-written report.