Value of a mixed stream Harte Systems, Inc., a maker of electronic survillance e
ID: 2817873 • Letter: V
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 horme security system. The proposed deal calls for the hardware chain to pay Harte $28,000 and $23,000 at the end of years 1 and 2 and to make annual year-end payments of $18,000 in years 3 through 9. A final payment to Harte of $25,000 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 1 1% 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 $110,000 for the rights to market the home security system. Which offer should Harte accept? a. Which of the following time lines represents the cash flows involved in the offer? (Select the best answer below.)Explanation / Answer
1)
Option B should be the timeline.
Since Harte systmes will be receiving the cash flows, cash flows will have positive signs
2)
Present value of year 1 cash flow = 28,000 / ( 1 + 0.11) = 25,225.225
Present value of year 2 cash flow = 23,000 / ( 1 + 0.11)2 = 18,667.316
Present value at year 2 for cash flow from year 3 through 9 = Annuity * [ 1 - 1 / ( 1 + r)n] / r
Present value at year 2 for cash flow from year 3 through 9 = 18.000 * [ 1 - 1 / ( 1 + 0.11)7 / 0.11
Present value at year 2 for cash flow from year 3 through 9 = 18.000 * 4.712196
Present value at year 2 for cash flow from year 3 through 9 = 84,819.533
Present value of cash flow from year 3 through 9 = 84,819.533 / ( 1 + 0.11)2 = 68,841.436
Present value of year 10 cash flow = 25,000 / ( 1 + 0.11)10 = 8,804.612
Present value of mixed stream of cash flows = 8,804.612 + 68,841.436 + 18,667.316 + 25,225.225
Present value of mixed stream of cash flows = $121,539
3)
series of payments
Harte should accept series of payments offer as it has a better present value.
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