Question

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 ​$32 comma 000 and ​$27 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 ​$30 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 9​% 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 ​$110 comma 000 for the rights to market the home security system. Which offer should Harte​ accept?

Answer 1

The correct timeline can be found in the attached image.

b. $115,589.11

c. Harte should accept the offer of the first company

Step-by-step explanation:

Present value is the cash flows discounted at the discount rate.

Present value can be calculated using a financial calculator:

Cash flow in year 1 = $32,000

Cash flow in year 2 = $27,000

Cash flow in year 3 - 9 = $12,000

Cash flow in year 10 = $30,000

Discount rate = 9%

Present value = $115,589.11

Harte should choose the offer of the first company because the present value of the first company is greater than the offer of the second company.

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