Part II. Problems

1. ABC Corporation has two offers for its latest powertrain system:

Option 1: $700,000 now plus $150,000 from the end of years 6 through 15. Moreover, if the product goes over $50 million in cumulative sales by the end of year 15, he will receive an additional $1,200,000. ABC Corporation thought there was a 70% probability this would happen.

Option 2: ABC Corporation would receive the proceeds/payments in a trust fund set up for the next nine years. At the end of that period, ABC Corporation would take out the total amount and discount it back to the present at 12%. The trust fund is expected to receive semi-annual payments of $80,000 (a total of $160,000 per year) for the next nine years. The payments would start immediately and are made at the beginning of each period.

Calculate the present value of each option and select the best offer.