Mr. Steve Vandallay from Granada Trading is negotiating to purchase exclusive rights to manufacture and market an energy efficient electronic gate. The current operator has offered Steve the choice of either a one-time payment of $1.5 million today or a series of five year-end payments of $385 000.

Required:

a) If Granada Trading has a cost of capital of 9%, which form of payment should Steve choose? (Show all workings).

(2 marks are allocated to this part of the question)

b) What annual end-of-year payment would make the two offers identical in value at a cost of capital of 9%? (Show all workings).

(2 marks are allocated to this part of the question)

c) Briefly comment and explain whether your answer to part a) of this question would be different if the yearly payments were instead made at the beginning of each year?

d) Show to Steve what difference, if any, that the change in timing of the yearly payments (from the end to the beginning of each year) would make to the present value calculation.

e) The after-tax cash inflows associated with this purchase are projected to amount to $500,000 per year for the next 15 years. Briefly explain whether this additional information will change the firms decision as to how to fund the initial investment?