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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 $1,800,000 today or a series of five year-end payments of $360,000.
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 $234,000 per year for 16 years. Will this factor change the firm's decision about how to fund the initial investment?
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