Will Semsch
17/02/2015
Case Study #1 In offer number one you would receive $1,000,000 now, $200,000 from year 6-15, then 3,000,000 if the product did $100,000,000 in sales, which had a 70% probability. To calculate to present value of 3,000,000 in 15 years you first have to multiply it by the possibility, 0.7 giving you 2,100,000. I then used the equation. 2,100,000* 1/(1.1)^15 giving an answer of $502,723.30. After that I calculated the value of the ordinary annuity from year 6-15 by using the equation 200,000*1/(1.1)^6 with the exponent increasing by one for each year. The annuity came to a total of $763,058.55. Once I added up all three payments it comes to a total present value of $2,265,781.85. Year | Payment | Present Value | 1 | $360,000 | $327,272.73 | 2 | $504,000 | $416,528.93 | 3 | $705,600 | $530,217.72 | 4 | $987,600 | $674,544.09 | In offer two 30% of the Bayer pharmaceutical profits were offered per year for four years. Bayer’s gross profit margin was 60% and sales were expected to increase 40% each year, with the expected first year sales of $2,000,000. With all that said here was what the payments would look like over four years. I used 1 as the “N” which increased by one for each payment. The payment amount I used as future value and 10% interest.
This offer results in a total cumulative present value of $1,948,563.47 For offer number three I found the present value to be $2,275,931.61. To find this I used 16 as the total number of periods since it is compounded semi-annually for 8 years. The period rate would be 5%. And the period payment is $200,000. Giving a present value of $2,275,931.61. In the end it is most value to choose offer #3 based on present value analysis.