Comprehensive Problem Essay Example for Free

Comprehensive Problem riseDr. Harold Wolf of Medical Research Corporation (MRC) disc everyplaceed a unique electronic stimulator that is said to afford the capability of reducing the pain from arthritis. Even though the Federal Drug Administration (FDA) s till has to authorize the device, and the testing is in the early stages, the interest generated is powerful. Dr. Wolf has start outd three wisecracks from interested parties and needs to settle which offer would make the most business sense. cover One includes additional monetary incentives dep terminateing on the succeeder of the device, crevice Two proposes a percentage of simoleonss that would increase as sales are judge to increase and the final offer is the setup of a trust fund in an annuity over the side by side(p) eight years. For discussion purposes here, each offer will be calculated to find the accede comfort and then summarized the offer with the highest turn in shelter will be identified for Dr. Wo lf to review.Offer OneIn this offer, Dr. Wolf is expecting a time to come value of $4,200,000 in 15 years at a 10% interest rate, in which the probability of the expected future value is 70%. The numbers used in getting the future value is to add the present values of $1,000,000, $200,000, and $3,000,000. The present value for the first offer is $1,005,446.61 which is an increase of $3,194,553.40 for the future and since this calculation has a 70% probability of happening, the first offer would be a good decision. See the calculations belowFV=1,000,000 + 200,000 + 3,000,000 =$4,200,000N =15I =10%PV=$8,974,419.42Offer TwoIn this offer, 30% of the buyers gross profit on the product for the next four years is the incentive Dr. Wolf must decide on. Zbay Pharmaceuticals would be the buyer whose gross profit margin was 60%.If offer two were accepted by Dr. Wolf, his future value after alone four years would have amassed approximately $3,138,300. This value assumes that he did not withdra w his profits and let the balance sit and gain 10% interest on the balance of the money and that sales grew by 40% in each of the subsequent years as anticipated by Zbay. Waiting till the fourth year to withdraw funds allowed the unused balance to compound interest payments. In general, this would be a good decision for the Dr. to accept, even considering the tax consequence that he would assume at the end of the four years. With the product not being approved by the FDA, Zbay Pharmaceutical has assumed all the bump which makes the offer even more lucrative.PV2,000,000 the first year and 40% Growth each additionalFV $5,488,000N 4 yearsPV dinero $360,000 year times 10%interest ($396,000)I 10%FV Profits $3,138,300Offer ThreeFor Offer three, Dr. Wolf may pick out for a trust fund over the next eight years. Once that period was over, he would receive the proceeds discounted back to the present at 10%. At that time, he would receive semi-annual payments in the heart of $400,000 per y ear beginning immediately in an annuity due. This may be a worthwhile alternative to consider depending on the future business plan Dr. Wolf has. This would make the present value $1,721,216. The map is shown below.Periods 12 3 4 5 67 8$400,000 400,000 400,000 400,000 400,000 400,000 400,000 400,000Present Value (PV) = $1,721,216Highest Present Value and ReasoningPresent value is the value on a specific date of a payment or payments in the future that have been calculated to show the time value of money as well as other(a) factors. These calculations are used industry wide as a method of the comparison of cash flows at different intervals over the life of the project. The basic present value formula is PV=FVPVIF(r, n). The formula for an annuity is alike(p) PV=PMTPVIFA(r, n). In that case, n=number of periods, r=interest rate in the period, PV=present value at the beginning and FV=future value at time n. There are many financial arrangements that are set up with structured payme nt schedules and the term annuity is used to refer to that set up.A stream of cash flow that has a limited number of payments periodically that are to be stock at given times is an annuity. If the payments were to be received indefinitely, then it would be perpetuity (Block, 2005). Based on this information, Offer I has the highest present value at $8,974,419.42At first glance, it is difficult to determine which offer major power be the most beneficial offer for Dr. Wolf to choose. The first offer includes additional incentives relating to the success of the device, the heartbeat offer a percentage of profits also relating to the success of the device, while the third is an annuity in trust over the next eight years.Offer One has a present value of $8,974,419.42, Offer Two has a total present value of $2,524,713 and Offer Three has a total present value of $1,721,216. Given that Offer One of Dr. Wolf expecting a future value of $4,200,000 in 15 years at a 10% interestrate, in whic h the probability of the expected future value is 70%, this would be the most advantageous offer for him to accept.ReferencesBlock, Stanley B., Hirt, Geoffrey A., Foundations of Financial Management (11th ed.),Irwin/McGraw-Hill, 2005, Burr Ridge, IL.