Question

Value of a mixed stream Harte​ Systems, Inc., a maker of electronic survillance​ equipment, is considering selling to a​ well-known hardware chain the rights to market its home security system. The proposed deal calls for the hardware chain to pay Harte ​$30,000 and ​$25,000 at the end of years 1 and 2 and to make annual​ year-end payments of ​$15,000 in years 3 through 9. A final payment to Harte of ​$10,000 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 12​% 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 ​$100,000 for the rights to market the home security system. Which offer should Harte​ accept?

Answer 1

Answer:

101,288

Explanation:

We can calculate the present value of each cash flow by dividing it by the rate of return along with the power of each period in which each cash flow occurs.

Requirement a:  Timeline that represents the cash flows involved in the offer

year 1 - 30,000  

year 2- 25000  

year 3 - 15000  

year 4 -15000  

year5 -15000

year6 -15000

year 7-15000

year8 -15000

year9 -15000

Requirement b: If Harte applies a required rate of return of 12​% to​ them

                                                  Present Value

year 1 - 30,000 /1.12                     26,786

year 2- 25000  /(1.12)^2               19,930

year 3 - 15000  /(1.12)^3               10,677

year 4 -15000  /(1.12)^4                9,533

year5 -15000 /(1.12)^5                  8,511

year6 -15000 /(1.12)^6                  7,599

year 7-15000/(1.12)^7                    6,785

year8 -15000 /(1.12)^8                  6,058

year9 -15000/(1.12)^9                   5,409

                                                   101,288

Requirement C:

It should accept the second offer of paying $100,000 as the first offer payment (i.e $101288.5) is greater than $100000