Q. Compute the present value?

The offer for the manufacturing rights is for a ten-year period.

Annual after-tax cash flow after Year 4 = $660000

Present value of this cash flow over six years at 12% = 660000 × 4·111 = $2713260

Present value of post Year 4 cash flows = 2713260 × 0·636 = $1725633

This net present value is equal to an annual benefit of 534383/ 5·650 = $94581

The after-tax value of the offer of $300,000 per year for 10 years = 300000 × 0·75 = $225000

In the lack of other information the offer should be accepted.

An alternative approach is to compute the present value of the offer

300000 × 0·75 × 5·650 = $1271250

Ever since this is greater than the NPV of investing by $736867 the offer should be accepted.

Posted Date: 7/11/2013 7:43:23 AM | Location : United States

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