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FinanceQ&A LibraryExecutives at Microsoft are interested to get into the drone delivery business. Since it would take them too much time to set up their own operation, they decide to acquire “Flyit” corporation. “Flyit” has been operating a drone delivery service for 4 years now, and they are the most successful operators in the market. Microsoft executives offer “Flyit” two purchase options. The first option is one $40 million lump sum payment. The second option is paying five annual payments of $10 million over the next five years.a) If the annual interest rate is 7%, find the present value of both options? [Note: you are supposed to show every step of your calculation and interpret the result] b) Evaluate the net present values of both option and identify which option is more cost effective for Microsoft?Question

Asked Oct 15, 2019

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Executives at Microsoft are interested to get into the drone delivery business. Since it would take them too much time to set up their own operation, they decide to acquire “Flyit” corporation. “Flyit” has been operating a drone delivery service for 4 years now, and they are the most successful operators in the market. Microsoft executives offer “Flyit” two purchase options. The first option is one $40 million lump sum payment. The second option is paying five annual payments of $10 million over the next five years.

a) If the annual interest rate is 7%, find the present value of both options? [Note: you are supposed to show every step of your calculation and interpret the result]

b) Evaluate the net present values of both option and identify which option is more cost effective for Microsoft?

Step 1

**(a) Calculation of present values of two options:**

**Answer:**

Net present values of both options are **$40 million **and **$41 million.**

**Option 1: **Lump sum payment

**Note: **Nothing is mentioned, it is assumed that single lump sum payment of $40 million is made in 0 year. Therefore, the present value is **$40 million.**

Step 2

**Option 2: **Based on five annual payments

**Calculation of present value:**

**Excel workings:**

Step 3

**Excel spreadsheet:**

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