Annuity Assignment

NPV 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 $1,300,000 today or a series of 5 year-end payments of $380,000.

a. If Simes has a cost of capital of 8%, 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 8%?

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 $247,000 per year for 15 years.

Will this factor change the firm’s decision about how to fund the initital investment?

a. If Simes has a cost of capital of 8%, the present value of the annuity is $ (Round to the nearest dollar.) Which form of payment should the firm choose? (Select the best answer below.)

O A. Annuity payment O B. Lump sum payment

Annuity Assignment

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b. The yearly payment that would make the two offers identical in value at a cost of capital of 8% is $. (Round to the nearest dollar.)

c. If the yearly payments were made at the beginning of each year, the present value of the annuity is $ (Round to the nearest dollar.) Which form of payment should the firm choose if the annuity payments are paid at the beginning of each year? (Select the best answer below.) OA. Lump sum payment O B. Annuity payment

d. The after-tax cash inflows associated with this purchase are projected to amount to $247,000 per year for 15 years. Will this factor change the firm’s decision about how to fund the initital investment? (Select the best answ below.) O A. No, the cash flows from the project will not influence the decision on how o fund the project. The investment and financing decisions are separate B. Yes, the cash flows from the project will influence the decision on how to fund the project. The investment and financing decisions are related.

Annuity Assignment

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