Value of a mixed stream. Acme, 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 Acme $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 Acme of $10,000 would be due at the end of year 10. Note that Acme does not get a payment in year 0.

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

B. If Acme 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 Acme an immediate one-time payment of $100,000 for the rights to market the home security system. Which offer should Acme accept?

SOLUTION

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

CF0	?
CF1	?
CF2	?
CF3	?
CF4	?
CF5	?
CF6	?
CF7	?
CF8	?
CF9	?
CF10	?

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

Required rate of return. 12%

Present value. ?

C. A second company has offered Acme an immediate one-time payment of $100,000 for the rights to market the home security system. Which offer should Acme accept?

Acme should accept the BLANK offer.

Requirements

1. In cell range E12:E22, input the cash flow for years 0:10, respectively. Note: Make sure that you enter each value preceded by the equal sign (=).

2. In cell E27, by using cell references to the given data and the function NPV, calculate the present value of the stream of payments.

3. In cell E31, type either first or second depending on which offer you would choose.