Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response he 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 is seriously considering two offers. Dr. Wolfs required rate of return is 8%.

Offer #1: Hampton Drug Co. is offering $1,000,000 now plus $200,000 from end of year 6 through end of year 15. Also, if the product reaches 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 of cumulative sales reaching $100 million.

Offer #2: Zbay Pharmaceutical is offering to pay Dr. Wolf a 35% royalty at the end of the next four years. The royalty is based on Zbay's gross profit margin on expected sales.

Sales in year one are projected to be $2,000,000. Sales are expected to grow each year by 40%. Zbays gross profit margin is 65%.