If annual sales of a product are forecast to be $100 million per year for 10 years, a team should consider a 5 percent royalty as equivalent to a $50 million up- front payment when negotiating a licensing or partnership agreement.

True

False

stipulate and describe at least two tax situations in which a written partnership agreement could be helpful to the partners. Then describe one non-tax reason for drafting a partnership agreement.

S-Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million and will produce net cash flows of $32 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $26 million per year. S-Airlines plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 14%.

A) By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions.

B) What is the equivalent annual annuity for each plane? Enter your answer in millions.

Danford enterprises can invest in one of two mutually exclusive machines that will make a product it needs for the next 8 years. Machine C cost $ 15 million but realizes after-tax inflows of $4.7 million per year for 4 years, after which it must be replaced. Machine D cost $25 milion and realizes after-tax inflows of $5.6 million per year for 8 years. Based on the firm's cost of capital of 7 percent, the NPV of Machine D is $8,439,272, with an equivalent annual annuity (EAA) of $1,413,306 per year. Calculate the EAA of Machine C. Compare your result to that of Machine D and decided which to recommend.

Select one:

a. EAAc = $271,578; Purchase Machine D
b. EAAc= $154,052; Purchase Machine D
c. EAAc= $2,187,984; Purchase Machine C
d. EAAc= $308,105; Purchase Machine D
e. EAAc= $349,498; Purchase Machine D