Question

You own a thriving restaurant but want to change careers. Your brother offers to buy the business with the following monthly payments: $2,750 at the end of each month for 4 years, followed by $3,000 at the end of each month for 3 years. Assuming that you can earn 9% compounded monthly, what is the equivalent cash price of your brother’s offer? (NPV)

Answer 1

	The equivalent cash price is the PV of the monthly payments
	when discounted at 9%, compounded monthly.
	The two streams are in the form of annuities.
	The PV of the two streams can be found out by using the
	formula for finding PV of annuities.
1)	PV of the 1st stream, at t0:
	= 2750*((1+0.09/12)^48-1)/((0.09/12)*(1+0.09/12)^48)) =	$ 1,10,508.15
2)	Discounted Value of the 2nd stream, at t4:
	= 3000*((1+0.09/12)^36-1)/((0.09/12)*(1+0.09/12)^36)) =	$     94,340.42
	PV of the above amount = 94340.42/(1+0.09/12)^48 =	$     65,907.55
3)	Equivalent cash price = 110508.15+65907.55 =	$ 1,76,415.70