The Following Problem Requires Some of the Following Present Value

question 25

Essay

The following problem requires some of the following present value information:
$$\begin{array} { | l | l | } \hline \text { pV af an ardinary annuity for } 20 \text { periods at } 12 \% & 7.46944 \\\hline \text { pV af an ordinary annuity for } 19 \text { periods at } 12 \% & 8.36497 .36578 \\\hline \text { pV af an ordinary annuty for } 18 \text { periods at } 10 \% 12 \% & 8.20147 .24967 \\\hline \text { pV of } 1 \text { for } 20 \text { periods at } 10 \% 12 \% & 0.10367\end{array}$$
Bioco sold a patent on a new laser process to Agent Co.The sales agreement which was signed on January 1,2011 requires Agent Co.to pay Bioco $2 million immediately.In addition,Agent is required to pay 500,000 each December 31 for 20 years starting with December 31,2011.Agent and Bioco estimate that 12 percent is an appropriate interest rate for this arrangement.
Required: a.Compute the present value of the receivable on Bioco's books on January 1,2011 immediately after receiving the $1 million down payment.
b.Compute the present value of the receivable on Biotech's books on December 31,2011.
c.Compute the present value of the receivable on Biotech's books on December 31,2012.

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Definitions:

Cross-price Elasticity of Demand

A measure of how the quantity demanded of one good responds to a change in the price of another good.

Quantity Demanded

The specific amount of a good that consumers are willing and able to buy at a given price.

Income Elasticity of Demand

A measure of how much the quantity demanded of a good changes in response to a change in consumers' income.

Goods and Services

The physical items (goods) and activities or benefits (services) that are produced and provided to satisfy consumers' needs and wants.