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.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter2: The One Lesson Of Business

Section: Chapter Questions

Problem 2.6IP

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