Offer One includes additional monetary Incentives depending on the success of the device, Offer Two proposes a percentage f profits that would Increase as sales are expected to Increase and the final offer Is the setup of a trust fund in an annuity over the next eight years. For discussion purposes here, each offer will be calculated to find the present value and then summarized; the offer with the highest present value will be identified for DRP. Wolf to review. Offer Nell this offer, DRP. Wolf Is expecting a future value of $4,200,000 In 15 years at a 10% Interest rate, in which the probability of the expected future value Is 70%.
The numbers used in getting the future value is to add the present values of $1. 000,000, 200,000, and The present value for the first offer which is an increase of for the future and since this calculation has a 70% probability of happening, the first offer would be a good decision. See the calculations + 200,000 + -151 Tool this offer, 30% of the buyer’s gross profit on the product for the next four years Is the Incentive DRP. Wolf must decide on. Saba Pharmaceuticals would be the buyer whose gross profit margin was 60%. If offer two were accepted by DRP.
Wolf, his future value after just four years would have amassed approximately $3,138,300. This value assumes that he did not withdraw his profits and let the lance sit and gain 10% interest on the balance of the money and that sales grew by 40% In each of the subsequent years as anticipated by Saba. Waiting till the fourth year to withdraw funds allowed the unused balance to compound Interest payments. In general, this would be a good decision for the DRP. To accept, even considering the tax consequence that he would assume at the end of the four years.
With the product not being approved by the FDA, Saba Pharmaceutical has assumed all the risk which makes the offer even more lucrative. The first year and Growth each additional: 4 years refits: $360,000 year times 10%lintiest II%IF profits: Therefore Offer three, DRP. Wolf may opt for a trust fund over the next eight years. Once that period was over, he would receive the proceeds discounted back to the present at 10%. At that time, he would receive semi-annual payments in the amount of $400,000 per year beginning immediately in an annuity due.
The basic present value formula is: n). The formula for an annuity is similar: UP=MET;Pilaf(r, n). In that case, n=number of periods, r=interest rate in the period, AY-?present value at the beginning and IF=future value at time n. There are many financial arrangements that are set up tit structured payment schedules and the term annuity is used to refer to that set up. A stream of cash flow that has a limited number of payments periodically that are to be received at given times is an annuity.
If the payments were to be received indefinitely, then it would be perpetuity (Block, 2005). Based on this information, Offer I has the highest present value at first glance, it is difficult to determine which offer might be the most beneficial offer for DRP. Wolf to choose. The first offer includes additional incentives relating to the success of the device, the second offer a percentage of profits also relating to the success of the device, while the third is an annuity in trust over the next eight years.
