Question

. You want to start a business that you believe can produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $250,000. At a discount rate of 16 percent, what is this business worth today?

Answer 1

The worth of the business today = $ 281,014.8

Step-by-step explanation:

Df = (1+r)^-n

Yr 1 Df@ 16% = (1+16%)^-1= 0.862

Yr 2 Df = 0.743

Yr 3 Df = 0.641

PV at Yr 1 = 0.862 x 5,600 = 4827.20

PV at Yr 2= 0.743 x 48,200= 35,812.6

PV at Yr 3= 0.641 x 125,000 = 80,125

Pv at Yr 3 ( Disposal ) = 0.641 x 250,000 = 160,250

Total PV = $ 281,014.8