Dr. Harold Wolf of Medical Research Corporations (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 not yet passed the rigorous federal testing from Health Canada and was still in the early stages of development, but the interest was intense. He received three offers, described below, for the discovery. An appropriate discount rate for this decision is 10% for the first 5 years and 12% for the remaining years.

Offer I Dr. Wolf will receive $1,000,000 now plus $200,000 each year from years 6 through 15. Also, if the product had over $100 million in cumulative sales by the end of year 15, he would receive an additional $3,000,000 at that time. Dr. Wolf thought there was a 70 percent probability this would happen. (Hint: Go back to chapter 4 and have a look at problems 1 and 6 to remember how you use probabilities when estimating sales.)

Offer II Dr. Wolf will receive 30 percent of the buyer's gross profit on the product for the next four years. The buyer in this case was Zhay Pharmaceutical. Zhay's gross profit margin was 60 percent. Year 1 sales are projected to be $2 million and then expected to grow by 40 percent per year in years 2, 3 and 4.

Offer III A trust fund would be set up for the next 8 years. At the end of that period, Dr. Wolf would receive the proceeds. The trust fund called for semi-annual payments for the next 8 years of $200,000. Payments would start immediately (beginning).

Required Use Excel to determine the present value of each offer and advise Dr Wolf on which offer he should select.

You must use the TVM functions in your calculations, you can not use your calculator or the TMV formulas.