Question

Congratulations! You are the inventor of a new technological marvel and you have received several offers from various tech companies for the rights to market your new invention. To decide which offer to accept, you must determine the PV of each offer and choose the one that is the highest.

Calculate the PV of each offer listed below using an 8% discount rate. Use the Appendices and then verify your answers using the time value functions on your calculator.

4. _________________ $175,000 per year for 10 years (ordinary annuity).

5. _________________ $200,000 today + $125,000 per year for 10 years (ordinary annuity).

6. _________________ $60,000 per quarter for 10 years (ordinary annuity).

Answer 1

4.
PMT = $175,000
Nper = 10
Rate = 8%
FV = 0

Present value can be calculated by using the following excel formula:
=PV(rate,nper,pmt.fv)
=PV(8%,10,-175000,0)
= $1,174,264.24

Present value = $1,174,264.24

5.
PMT = $125,000
Nper = 10
Rate = 8%
FV = 0

Present value can be calculated by using the following excel formula:
=PV(rate,nper,pmt.fv)
=PV(8%,10,-125000,0)
= $838,760.17

Total present value = $200,000 + $838,760.17 = $1,038,760.17

6.
PMT = $60,000
Nper = 10 * 4 = 40
Rate = 8% / 4 = 2%
FV = 0

Present value can be calculated by using the following excel formula:
=PV(rate,nper,pmt.fv)
=PV(2%,40,-60000,0)
= $1,641,328.75

Present value = $1,641,328.75

The present value of $60,000 per quarter for 10 years is higher compared to others. Thus, the offer of $60,000 per quarter for 10 years should be accepted.