Question
Simes Innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The car's inventor has offered Simes the choice
Simes Innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The car's inventor has offered Simes the choice of either a one-time payment of $2,000,000 today or a series of 7 year-end payments of $385,000.
a.If Simes has a cost of capital of 14%, which form of payment should it choose?
b.What yearly payment would make the two offers identical in value at a cost of capital of 14%?
c.What would be your answer to part a of this problem if the yearly payments were made at the beginning of each year?
d.The after-tax cash inflows associated with this purchase are projected to amount to $250,250 per year for 15 years. Will this factor change the firm's decision about how to fund the initital investment?
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