Christiansfeld Akustik, a Danish acoustics entity, licensed its technologies to Nykøbing Hovedtelefoner, a headphones manufacturer. The licensing agreement isn't based on market terms because the fair value of the agreement can't be readily determined. However, the agreement calls for royalty payments of Kr2.5 million at the beginning of each year for five years. The prevailing market rate is 5.6 percent. A local consulting firm brokered the deal and wrote the contracts. They charged Christiansfeld Akustik Kr1.3 million for their services. What is the fair value of the agreement to Christiansfeld Akustik?
A) Kr12,542,703
B) Kr11,946,499
C) Kr11,242,703
D) Kr10,646,499
E) None of the above

Question

Quizplus · Accepted Answer

The fair value of the agreement is the present value of the royalty payments, discounted at the prevailing market rate. The present value of the royalty payments is:PV = Kr2.5 million * (1 - 1 / (1 + 0.056)^5) / 0.056 = Kr12,542,703The fair value of the agreement is therefore Kr12,542,703.

Christiansfeld Akustik, a Danish Acoustics Entity, Licensed Its Technologies to Nykøbing