As an innovative way to pay for various software packages that your company sells, a high-tech service company has offered to pay your company in any one of three ways:
(1) pay $450,000 now;
(2) pay $1.1 million 5 years from now; or
(3) pay $200,000 now and $400,000 two years from now.
You want to earn a real return of 10% per year and the inflation rate is 6% per year in the specialized software market. (a) Use PW analysis to determine which offer you should accept with inflation considered. (b) Determine the market return rates at which all three methods have the same PW value.
(a) Find present worth of all three plans
Method 1: PW1 = $450,000
Method 2: if = 0.10 + 0.06 + (0.10)(0.06) = 0.166 (16.6%)
PW2 = 1,100,000(P/F,16.6%,5)
= 1,100,000(0.46399)
= $510,389
Method 3: PW3 = 200,000 + 400,000(P/F,16.6%,2)
= 200,000 + 400,000(0.73553)
= $494,214
Select payment method 2 with the highest PW value
(b) Rates are different for method 2 and 3, but they must both equal PW1 = $450,000. Use
Goal Seek for each of method 2 and 3 to obtain if-2 = 19.57 % and if-3 = 26.49%
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