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A major automotive company is considering an agreement with a small manufacturer whereby it would be required to make end-of-the-year royalty payments of $500 000 beginning in year 4 and ending in year 8 (five years in total). An immediate lump sum payment of $1 500 000 is being considered as an alternative to this royalty scheme.

What cost-of-capital rate makes the royalty and lump sum payment alternatives equally acceptable?

What alternative is preferred if the company's cost of capital is in fact lower than this break-even rate?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92051431

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