Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response he had received from drug companies for his latest discovery, a unique electronic stimulator that reduces the pain from arthritis. The process had yet to pass rigorous Federal Drug Administration (FDA) testing and was still in the early stages of development, but the interest was intense. He received the three offers described in the following paragraph. (A 10 percent interest rate should be used throughout this analysis unless otherwise specified.) Page 287 Offer I $1,000,000 now plus $200,000 from year 6 through 15. Also if the product did over $100 million in cumulative sales by the end of year 15, he would receive an additional $3,000,000. Dr. Wolf thought there was a 70 percent probability this would happen. Offer II Thirty percent of the buyer's gross profit on the product for the next four years. The buyer in this case was Zbay Pharmaceutical. Zbay's gross profit margin was 60 percent. Sales in year 1 were projected to be $2 million and then expected to grow by 40 percent per year. Offer III A trust fund would be set up for the next eight years. At the end of that period, Dr. Wolf would receive the proceeds (and discount them back to the present at 10 percent). The trust fund called for semiannual payments for the next eight years of $200,000 (a total of $400,000 per year). The payments would start immediately. Since the payments are coming at the beginning of each period instead of the end, this is an annuity due. Assume the annual interest rate on this annuity is 10 percent annually (5 percent semi-annually). Determine the present value of the trust fund's final value. Hint: See the section "Annuities Due @." Required: Find the present value of each of the three offers and indicate which one has the highest present value.

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug's profits will be $1 million in its first year and that this amount will grow at a rate of 2% per year for the next 17 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero, What is the present value of the new drug if the interest rate is 8% per year? The present value of the new drug is 5 million (Round to three decimal places.)

A new antitheft system incorporating MEMS technology is being separately evaluated economically by three engineers at Dragon Technologies. The first cost of the equipment will be $85,000, and the life is estimated at 6 years with a salvage value of $9000. The engineers made different estimates of the net savings that the equipment might generate. Jacob made an estimate of $12,000 per year. Susan states that this is too low and estimates $13,000, while Tyler estimates $23,000 per year before tax. If the MARR is 8% per year, use PW to determine if these different estimates will change the decision to purchase the equipment. The present worth of the pessimistic estimate is $[ The present worth of the most likely estimate is $ The present worth of the optimistic estimate is $ The equipment purchase by the pessimistic estimate is (Click to select) The equipment purchase by the most likely estimate is [(Click to select) The equipment purchase by the optimistic estimate is [(Click to select)

Solomon Auto Repair, Inc. is evaluating a project to purchase equipment that will not only expand the company's capacity but also improve the quality of its repair services. The board of directors requires all capital investments to meet or exceed the minimum requirement of a 10 percent rate of return. However, the board has not clearly defined the rate of return. The president and controller are pondering two different rates of return: unadjusted rate of return and internal rate of return. The equipment, which costs $106,000, has a life expectancy of five years. The increased net profit per year will be approximately $6,100, and the increased cash inflow per year will be approximately $29,405. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a-1. Determine the unadjusted rate of return and (use average investment) to evaluate this project. (Round your answer to 2 decimal places. (i.e., 0.2345 should be entered as 23.45).) a-2. Based on the…