Question

An investor can purchase a small business today for $302,800.00. The investor plans on holding the business for three years, and wants a 18.00% annual return on his investment. He feels he can sell the business for $376,700.00 in three years. In addition, he also believes he can create an annual cash flow of $39,850.00 over the next three years from operating the business.

What is the value today of the expected cash flows from this investment? (This is the net value, so include the cost at year 0) Answer format: Currency: Round to: 2 decimal places.

Should the investor purchase the small business today? (Yes or No)

Answer 1

Solution

Present value of a cashflow=Cashflow/(1+r)^n

Where

r-intrest rate or reqd rate of return=18%

n-number of periods of discounting

Therefore the NPV of thei investment=Present value of annual cashflow+Presaent value of selling price-Initial investment

NPV=39850/(1+.18)^1+39850/(1+.18)^2+39850/(1+.18)^3+376700/(1+.18)^3-302800

Solving we Get NPV=$13116.03(Value today)

Yes he should invest as the NPV>0

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