Value of a mixed stream Harte Systems, Inc., a maker of electronic survillance equipment, is considering selling the rights to
market its home security system to a well-known hardware chain. The proposed deal calls for the hardware chain to pay Harte $28 comma 000 and $21 comma 000 at the end of years 1 and 2 and to make annual year-end payments of $12 comma 000 in years 3 through 9. A final payment to Harte of $15 comma 000 would be due at the end of year 10. a. Select the time line that represents the cash flows involved in the offer. b. If Harte applies a required rate of return of 11% to them, what is the present value of this series of payments? c. A second company has offered Harte an immediate one-time payment of $90 comma 000 for the rights to market the home security system. Which offer should Harte accept?
1 answer:
Answer:
A. See attached image
B. $93,446.35
C. He should accept the first offer from the hardware chain
Explanation:
A time line is a line that chronological orders events according to the time they occurred
The present value is the present value of after tax cash flows from an investment.
The present value can be calculated using a financial calculator.
Cash flow for year 1 =$28,000
Cash flow for year 2 =$21,000
Cash flow for year 3 -9 =$12,000
Cash flow for year 10 =$15.000
I = 11%
PV =$93,446.35
Hart should accept the first offer from the hardware chain because the present value of the first offer $93,446.35 is greater than the present value of $90,000.
I hope my answer helps you.
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