help with finance problem. using ti-84 or formula

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?

 

 

Answer 1

I would compare the value that you would get today ($176,000) to the present value of the future cash flows that you would receive as a result of operating the company. I am assuming that Kate will not pay anything to you for the company after 10 years, so I am only accounting for the value she brings to the company while we have a 10 year contract.

I use the CF keys on my calculator. I have a TI BA II Professional.

CF0 is 0, CF1-10 = (85,000-65,000) = 20,000, I=8, and I compute NPV = $134,202

Since the NPV of these future cash flows is lower than what you could get today if you sold the company, $176,000, the answer would be to sell the company today.