Salim Innovations, Inc., is negotiating to purchase exclusive rights to manu- facture and market a solar-powered toy car. The car's inventor has offered Salim the choice of either a one-time payment of US$1,500,000 today or a series of 5 year-end payments of US$385,000.
a. If Salim has a cost of capital of 9 percent, which form of payment should it choose?
b. What yearly payment would make the two offers identical in value at a cost of capital of 9 percent?
c. Would your answer to part a of this problem be different if the yearly payments were made at the beginning of each year? Show what difference, if any, that change in timing would make to the present value calculation.
d. The after-tax cash inflows associated with this purchase are projected to amount to US$250,000 per year for 15 years. Will this factor change the firm's decision about how to fund the initial investment?