Question

You want to buy a business. Have you estimated that you will start to make profits from the second year and up to year 4 estimated at $ 25,000. You have also estimated that your earnings will grow from that year and until year 10 and that you will generate $ 60,000 at the end every year. • Assume an opportunity cost in your investment of a 7% computed annually. Find the Value of that investment today.

Answer 1

The total investment value today(present value of cash flow)  can be calculated with help of factor for present value table.Take the present value factor corresponding to the the rate of return and no, of year and multiply with the annual cash flow.

For ex-

Present value factor of year 2 at 7 % rate is 0.873.

Cash flow for year 2 = $ 25000

Present value of cash flow = 0.873 * 25000 = 21825

Like this, present value for all the years is calculated in below table-

year	Cash flow each year	PVF(7%,n)	Present value of cash inflow
1	0	0.935	0
2	25000	0.873	21825
3	25000	0.816	20400
4	25000	0.763	19075
5	60000	0.713	42780
6	60000	0.666	39960
7	60000	0.623	37380
8	60000	0.582	34920
9	60000	0.544	32640
10	60000	0.508	30480
			279460

Total of present value of all future cash flows = $ 2,79,460

Value of that investment today = $ 2,79,460

Hope it clarifies!