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.

a. Lay out the cash flows involved in the offer on a time lin

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?

Instructions are listed below.

Explanation:

Giving the following information:

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 an annual year-end payments of $15,000 in years 3 through 9. The final payment to Harte of $10,000 would be due at the end of year 10.

1)

Cash flows:

Year 1 = 30,000

Year 2 = 25,000

Year 3 = 15,000

Year 4 = 15,000

Year 5 = 15,000

Year 6 = 15,000

Year 7 = 15,000

Year 8 = 15,000

Year 9 = 15,000

Year 10 = 10,000

2) To calculate the present value we need to use the following formula for each cash flow:

PV = FV / (1+i) ^n

Year 1 = 30,000/1.12 = 26,785.71

Year 2 = 25,000/1.12 = 22,321.43

Year 3 = 15,000/1.12 = 13,392.86

...

Year 10 = 10,000/1.12^10 = 3,219.73

PV = $104,508.27

3) The present value of cash inflows is higher than $100,000. It is more convenient to decline the $100,000.