Question

You are thinking about selling your fishing excursion company. You can sell it today for $176,000. Or, you can sign a ten year contract with the first mate, Kate, where she operates the business, will own it after the contract, and you get all the profits, net of Kate's salary. Kate will only sign the contract if her salary is $65,000 or above per year. You estimate that the revenues for the company will be $85,000 per year, before paying Kate's salary. If the discount rate is 8%, should you sign the contract?

Using ti-84 calculator

Answer 1

To find out if you should sign the contract, we need to compare $176,000 sale value today with present value of ten year's profit.

Profit per year = revenue per year - Kate's salary per year = $85,000 - $65,000 = $20,000

Present value of profits = (profit per year/discount rate)*[1 - 1/(1+discount rate)no. of years] = ($20,000/0.08)*[1 - 1/(1+0.08)10] = $250,000‬*(1 - 1/1.0810) = $250,000*(1 - 1/2.15892499727278669824‬) = $250,000*(1 - 0.46319348808468448046743799829241‬) = $250,000*0.53680651191531551953256200170759‬ = $134,202

present value of ten year's profit is $134,202 which is less than $176,000 sale value today. so, you should sign the contract.

ti-84 calculator is a maths and science calculator and I think it doesn't have function to calculate net present value. ti BA II plus finance calculator can be used to calculate net present value.