Question #168579

**)** Harte Systems, Inc., a maker of electronic surveillance 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.

** i.** Lay out the cash flows involved in the offer on a time line.

**ii.** If Harte applies a required rate of return of 12% to them, what is the present value of this series of payments?

** iii.** 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?

Expert's answer

i.

ii.

"PV=\\frac{FV}{(1+i)^1}+\\frac{FV}{(1+i)^2}+...+\\frac{FV}{(1+i)^n}=\\frac{30000}{(1+0.12)^1}+\\frac{25000}{(1+0.12^2}+...+\\frac{10 000}{(1+i)^{10}}=104 508.28"

iii.

the current value from the first company is greater than the offer of the second. therefore, the offer of the second company is inappropriate

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