Ms. cleanair recived three offers from major automobile companies for her patent on a new hybrid drive system for medium sized 4 wheel drive trucks. She will use a discount rate of 12% to evaluate each offer.
Offer 1- $500,000 now plus $120,000 for the end of year 6-15. Also if the product goes over $50,000,000. Ms Cleanair thought there was a 75% probability this wouel happen.
Offer 2- 25% of the buyers gross margin for the next four years. The buyer General Cars. (GC) Its gross margin is 65%. Forst sales for one year of the new truck are projected to be $1,000,000 and then grow by 40% per year.
Offer 3- A trust fund would be set up for the next nine years. At the end of that time period, Ms. Cleanair would receive the proceeds ( discount them back to the present at 12%). The trust fund called for semiannual payments for the next nine years of $80,000 ( a total of $160,000 per year). The payments would start immediatly. Since the payments are coming at the beginning of each period instead of the end, this is an annuity due. To look up the future value of the annuity due in the tables, add 1 to n (18 + 1) and subtract from the value in the table. Assume the annual intrest rate of 12% Determine the present value of the trust's fund final value.
Required: Find the present value of each of the three offers and then indicate which one has the highest present vlaue.