Nadine Chelesvig has patented her invention. She is offering a patent manufacturer two contracts for the exclusive right to manufacture and market her product. Plan A calls for an immediate single lump payment to her of $32,000. Plan B calls for an annual payment of $1,200 plus a royalty of $0.50 per unit sold. The remaining life of the patent is 10 years. Nadine uses a MARR of 9 %/year. Required:
a. What must be the uniform annual sales volume of the product for Nadine to be indifferent between the contracts, based on a present worth analysis?
b. If the sales volume is below the volume determined in (a), which contract would the manufacturer prefer?

Nadine Chelesvig

a. The uniform annual sales volume of the product for Nadine to be indifferent between the contracts, based on a present worth analysis is:

= 7,572 units

b. If the sales volume is below the volume determined in (a), the manufacturer would prefer Contract A to B.

Explanation:

a) Data and Calculations:

Plan A present value = $32,000 (because it is an immediate single lump payment)

Plan B annual payment = $1,200 plus a royalty of $0.50 per unit sold

The useful life of the patent = 10 years

MARR = 9%

Present value annuity factor for 10 years at 9% = 6.418

Therefore, Plan A's equivalent annual payment = $32,000/6.418 = $4,986

For Nadine to be indifferent between Plan A and Plan B, the present value of Plan B annual payment = Plan A equivalent annual payment

That is, $1,200 + $0.50x = $4,986, where x = units sold

Solving the above equation, $0.50x = $4,986 -$1,200

= $0.50x = $3,786

x = $3,786/$0.50

x = 7,572 units

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anjan should should report alteast 5000 on the first apyment and 10,000 each year

explanation: