Question

Harte Systems inc a maker of electronics 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 32,000 and 27,000 at the end of Years 1 and 2 and to make annual year end payments of 10,000 in years 3 through 9. a final payment to Harte of 30,000 would be due at the end of year 10. a. if Harte applies a required rate of return of 12% to them, what is the present value of this series of payments? b. a second company has offered Harte an immediate one time payment of 90,000 for the rights to market the home security system. which offer should Harte accept? a one time payment or series of payments?

Answer 1

a.Present value=Cash flows*Present value of discounting factor(rate%,time period)

=32000/1.12+27000/1.12^2+10,000/1.12^3+10,000/1.12^4+10,000/1.12^5+10,000/1.12^6+10,000/1.12^7+10,000/1.12^8+10,000/1.12^9+30,000/1.12^10

=$96136.85(Approx)

b.Hence  a series of payments should be accepted having higher present value.