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. 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. 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? For part (a), you need to use (timeline and formulas only. For part (b) you need to use your calculator functions (PV, FV, PMT, I/Y, and N) to estimate the value of each offer. Compare the answers from parts (a) & (b); they must match. Showing Detailed work for parts (a) and (b) is required. Compare the present value of the 3 offers. The offer with the highest present value must be chosen.

Using MS Excel (Spreadsheets) is NOT allowed. Make sure you turn in a clean solution (hardcopy only before the lecture). The way you present your project matters. You need to turn in a typed report.