Sub: Finance Topic: Capital Budgeting
Question:
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.
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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 below this paragraph. (A 10 percent interest rate should be used throughout
this analysis unless otherwise specified.) 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 one were projected to be $2 million and then
expected to grow by 40 percent per year.
Solution:
Income for Harold Wolf = 30% of buyer's gross profit.
Gross Profit for Zbay's = 60%
Expected growth in Sales= 40%
Year = 1 2 3 4
$ $ $
Sales = $2,000,000 2,800,000 3,920,000 5,488,000
Gross Profit for Zbay's = $0 $0 $0 $0
Income for Harold Wolf = $0 $0 $0 $0
Present Values (PV) = 327272.73 504000 705600 987840
$
Total Present Value of the Offer II = 2,524,713
** End of the Solution **
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