Comprehensive Problem, Medical Research Corporation
Dr. Harold Wolf of Medical Research Corporation (MRC) discovered a unique electronic stimulator that is said to have the capability of reducing the pain from arthritis. Even though the Federal Drug Administration (FDA) still has to approve the device, and the testing is in the early stages, the interest generated is powerful. Dr. Wolf has received three offers from interested parties and needs to decide which offer would make the most business sense. Offer One includes additional monetary incentives depending on the success of the device, Offer Two proposes a percentage of 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 Dr. Wolf to review.
Offer OneIn this offer, Dr. 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 $3,000,000. The present value for the first offer is $1,005,446.61 which is an increase of $3,194,553.40 for the future and since this calculation has a 70% probability of happening, the first offer would be a good decision. See the calculations below:FV=1,000,000 + 200,000 + 3,000,000 =$4,200,000N =15I =10%PV=$8,974,419.42Offer TwoIn this offer, 30% of the buyer 's gross profit on the product for the next four years is the incentive Dr. Wolf must decide on. Zbay Pharmaceuticals would be the buyer whose gross profit margin was 60%. If offer two were accepted by Dr. 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 balance sit and gain 10% interest on the balance of the money and
Offer OneIn this offer, Dr. 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 $3,000,000. The present value for the first offer is $1,005,446.61 which is an increase of $3,194,553.40 for the future and since this calculation has a 70% probability of happening, the first offer would be a good decision. See the calculations below:FV=1,000,000 + 200,000 + 3,000,000 =$4,200,000N =15I =10%PV=$8,974,419.42Offer TwoIn this offer, 30% of the buyer 's gross profit on the product for the next four years is the incentive Dr. Wolf must decide on. Zbay Pharmaceuticals would be the buyer whose gross profit margin was 60%. If offer two were accepted by Dr. 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 balance sit and gain 10% interest on the balance of the money and
References: Block, Stanley B., Hirt, Geoffrey A., Foundations of Financial Management (11th ed.),Irwin/McGraw-Hill, 2005, Burr Ridge, IL.