Dr. C. Raymond of International Medical University (IMC) was thrilled

Question 1Dr. C. Raymond of International Medical University (IMC) was thrilled with the response he had received from drug companies for his latest discovery, a type of traditional herb that could cure the Influenza A (H1N1). 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:Offer 1 $10,000 now plus $20,000 from year 6 through 15. Also if the product receives tremendous demand and sales keep increasing over the end of year 15, he would receive an additional $300,000. Dr. Raymond thought there was a 100 percent probability this would happen.Offer 2 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 $0.2 million and then expected to grow by 40 percent per year.Offer 3 A trust fund would be set up for the next 8 years. At the end of that period, Dr. Raymond would receive the proceeds. The trust fund called for semiannual payments for the next 8 years of $20,000.Assuming the annual interest rate on this annuity is 10 percent, determine each of the three offers and indicate which one is the best for Dr. Raymond.[20 marks]Question 2You have just had your 30th birthday. You have two children. One will go to college 10 years from now and require four beginning-of-year payments for college expenses of $10,000, $11,000, $12,000 and $13,000. The second child will go to college 15 years from now and require four beginning-of-year payments for college expenses of $15,000, $16,000, $17,000 and $18,000. In addition, you plan to retire in 30 years. You want to be able to withdraw $50,000 per year (at the end of each year) from an account throughout your retirement. You expect to live 20 years beyond retirement. The first withdrawal will occur on your 61st birthday. In addition to that, you are planning for buying a cabin in the mountains 8 years from now at an estimated cost of $80,000. You can afford to save only $2,000 per year at the end of each year for the first 12 years.Required:What equal, annual, end-of-year amount must you save for year 13 to 30 to meet these goals, if all savings earn a 13 per cent annual rate of return?

 

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