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Case Study Dr Harold Wolf

614 words - 3 pages

COMPREHENSIVE PROBLEMDr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response he had received from drug companies for his latest discovery, a unique electronic stimulator that reduces the pain from arthritis. The process had yet to pass rigorous Federal Drug Administration (FDA) testing and was still in the early stages of development, but the interest was intense. He received the three offers described below this paragraph. (A 10 percent interest rate should be used throughout this analysis unless otherwise specified.)Offer I $1,000,000 now plus $200,000 from year 6 through 15. Also if the product did over $100 million in ...view middle of the document...

Offer III A trust fund would be set up for the next 8 years. At the end of that period, Dr. Wolf would receive the proceeds (and discount them back to the present at 10 percent). The trust fund called for semiannual payments for the next 8 years of $200,000 (a total of $400,000 per year).The payments would start immediately. 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 an annuity due in the tables, add 1 to n (16 + 1) and subtract 1 from the value in the table. Assume the annual interest rate on this annuity is 10 percent annually (5 percent semiannually). Determine the present value of the trust fund's final value.Required: Find the present value of each of the three offers and indicate which one has the highest present value.Solution:Offer I$1,000,000 now plus $200,000 from year 6 through 15 (deferred annuity)0.70 × $3,000,000 = $2,100,000Total value of Offer I$1,000,000 Payment today763,209 Present value of deferred annuity501,900 Present value of $3 million bonus$2,265,109Offer II Gross Profit Payment 30%Year Sales (60% of Sales) of Gross Profit1 $2,000,000 $1,200,000 $360,0002 2,800,000 1,680,000 504,0003 3,920,000 2,352,000 705,6004 5,488,000 3,292,800 987,600Year Payment PV Factor PV1 $360,000 .909 $327,2402 504,000 .826 416,3043 705,600 .751 529,9064 987,600 .683 674,531Total value of Offer II $1,947,981Offer IIIFuture value of an annuity due8 years - semiannuallyn = 16 + 1 = 17i = 10%/2 = 5%FVIFA = 25.840 - 1 = 24.840

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