What yearly payment would make the two offers identical

Reference no: EM13204191

NPV Simes innovations, Inc., is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. To acquire the rights, the car's inventor has given Simes the choice of making either a one-time payment of $1,875,000 today or a series of 5 year-end payments of $481,250. In either case the payments would be treated as an operating expense. Simes' tax rate is 20 percent, while their cost of capital is 9 percent.

a. Which payment option should the company choose?

b. What yearly payment would make the two offers identical?

c. Would your answer to part a be different if the yearly payments were made at the beginning of each year? Show your work.

d. If Simes acquires the rights to the car, the new project will result in incremental before-tax cash inflows of $312,500 per year for 15 years. Will this factor change the firm's decision as to how to acquire the rights to the car? Explain?

Reference no: EM13204191

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