Present Value Calculation and the Importance Fo Placement in the Marketing Mix Essay

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price for the Zartek technology, the most appropriate approach is to start by looking at the value it is expected to create. The net income for each of the years have been provided. However, under the concept of the time value of money, income received in the future will have a lower value compared to the same amount held today. Inflation will erode the value of money, while money held today may be invested for a return for the future (Drake & Fabozzi, 2009). Therefore, the first stage is to look at the future net revenue streams and discount them to allow for the time value of money. Giving a present value (PV). This is undertaken by discounting each year's net revenue on a compound basis (Drake & Fabozzi, 2009). As it is assumed the interest rate for the 5 years is 7%, the discount factor used will be 7% on a compound basis. This is shown in table 1 below.

Table 1; Present Value Calculation

Year

1,000

0.934579

Year

1,300

0.873439

1,135.47

Year 3

1,200

0.816298

Year 4

1,300

0.762895

Year 5

1,200 0.712986

Total discounted cash flow (PV)

4,896.

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95

This indicates the value of the use of the technology. If the firm is going to sell the technology, Globus Maximus Enterprises who are purchasing it must see a finical advantage to the purchase; where the opportunity costs are minimised and a profit may be created (Nellis & Parker, 2006). This means the price would need to be below the $4,896.58 PV, otherwise there would be no profit margin left for Globus Maximus Enterprises greater than the 7% that could be achieved from a standard bank investment.

As Zartek have invested $2,000, it may also be assumed that the firm will wish to recoup the investment costs as well as make a profit. This now gives a price range of between $2,000 and $4,896.95. If we make the assumption that both firms should gain equal benefit, this would give a median price level of $3,448.48. This could be the starting point for the negotiation,. Other factors may also adjustments to either the discount rate, or the price, based on the level of risk or certainty associated with the forecast income streams. There may also.....

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