Question

Carrie Tune will receive \(19,500 for the next 20 years as a payment for a new song she has written. If a 10 percent rate is applied, should she be willing to sell out her future rights now for \)160,000?

Short answer

Carrie Tune should not sell the future rights at $160,000.

Step-by-step solution

Identification of the required information

Payment (PMT) = $19,500

Period (n) = 20 year

Interest Rate (i) = 10%

Current value (PV)

$$\begin{gathered} \text{PV}\mathbf{=}\text{PMT}\times \left[\frac{1-{\left(1+i\right)}^{-n}}{i}\right] \\ \mathbf{=}\$19,500\times \left[\frac{1-{\left(1+10\%\right)}^{-20}}{10\%}\right] \\ \mathbf{=}\$166,014.49 \end{gathered}$$

Final Decision

Carrie Tune should not be willing to sell his future rights at $160,000 because the present value of the future rights, $166,014.49, is greater than $160,000.