Text Problem (HELP)
General Weapons, Inc. (Comprehensive time value of money) Mr. Rambo, President of General Weapons, Inc., was pleased to hear that he had three offers from major defense companies for his latest missile firing automatic ejector. He will use a discount rate of 10 percent to evaluate each offer.
OfferI | $1,200,000 now plus $625,000 from the end of years 6 through 15. Also if the product goes over $60 million in cumulative sales by the end of year 15, he will receive an additional $3,000,000. Rambo thought there was an 80 percent probability this would happen. |
Offer II | Thirty percent of the buyer’s gross margin for the next four years. The buyer in this case is Air Defense, Inc. (ADI). Its gross margin is 60 percent. Sales for year 1 are projected to be $3.5 million and then grow by 35 percent per year. This amount is paid today and is not discounted. |
Offer III | A trust fund would be set up for the next four years. At the end of that period, Rambo would receive the proceeds (and discount them back to the present at Required: Find the present value of each of the three offers and then indicate which one has the highest present value. |