$($NEED Work shown for calculations$)$

Boston Medical Apparatus Company

The Time Value of Money

Dr$.$ Smith of the Boston Medical Apparatus Company was thrilled with the

response she had received from two medical product manufacturers for her latest

discovery, a unique electronic pulsar that reduces the pain from arthritis. The product is

still in early stage testing, but the interest was apparent. She received firm offers to buy

the rights to production from the two companies described below.

Offer I: The buyer in this case was Smythe Manufacturing. They offered Dr$.$ Smith $$2$

million now plus $$100,000$ each year beginning at the end of year six and continuing

through the end of year fifteen.

You are Dr$.$ Smiths$$s financial advisor and you feel that given the associated risks to this

payment stream, a $10\%$ interest $($discount$)$ rate should be used to determine the present

value of the offer.

Offer II: The buyer in this case was Brouwer Pharmaceutical. They offered $40$ percent

of their gross profit on the product for the next four years, with payments beginning at the

end of the first year. Brouwer$$s gross profit margin was $60\%.$ Sales in year one were

projected to be $$3$ million and are forecasted to grow by $30$ percent each year thereafter.

You are Dr$.$ Smiths$$s financial advisor and you feel that given the associated risks to this

payment stream, an $8\%$ interest $($discount$)$ rate should be used to determine the present

value of the offer.

Instructions:

Please prepare $11(1)/(2)$ page written memorandum recommending either Offer I or Offer

II above. The recommendation must be for the highest present value based upon your

calculations. Dr$.$ Smith has no idea what present value is or how it can be used to value

the two offers. The memorandum must include a brief explanation of the present value

concept and an explanation as to why the two discount $($interest$)$ rates differ. Do not

write a memo that explains the calculations, write a memo that explains the concept.

Use full sentences in a paragraph format and attach a separate sheet with your present

value calculations $($Show Work$).$