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 $1,500,000 today or a series of five year-end payments of $385,000.
a. If Simes has a cost of capital of 9%, 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 9%?
c. The after-tax cash inflows associated with this purchase are projected to amount to $250,000 per year for 15 years. Will this factor change the firm's decision about how to fund the initial investment?