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.
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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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.
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