Baskin is a young entrepreneur who invented a new product with his best friend, Arthur. Arthur has since left the company, but still receives royalty payments of 34% of the profit from the product.
Baskin has received an interesting offer. Argent, Inc. would like to purchase the product, but wants to be sure it can market it at a profit. Argent believes it will take time to build support for it. The company would give Baskin $193660 at the end of year 1. To give Argent time to build a customer base, it will make payments at the end of each year, beginning at the end of year 4 for 6 years. The first payment will be $49540, with subsequent payments decreasing by 10% each year. Baskin will still be responsible for making the royalty payments to Arthur.
In terms of present worth, how much would Baskin receive from the deal (after making the royalty payments to Arthur)? Use an interest rate of 2% compounded annually.
Hint: Consider the payments from Argent to be pure profit to Arthur and Baskin.