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29 February, 22:28

You own a business which generates $200,000 in profit per year. Someone has offered to buy it from you. Based on a 5 year projection and belief that you could earn 9% annually if you had the money today, how much do you believe the business is worth today?

a. $700,000.00

b. $777, 930.25

c. $440,000.00

d. $536, 522.43

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Answers (1)
  1. 1 March, 02:08
    0
    option (b) $777,930.25

    Explanation:

    Data provided in the question:

    Profit per year = $200,000

    Time = 5 years

    Return, r = 9% = 0.09

    Now,

    Worth of business = ∑ (Cash flow * Present value factor)

    also,

    Present value factor = (1 + r) ⁻ⁿ

    here,

    n is the year of cash flow

    Thus,

    Year Cash Flows Present value factor Present value of cash flow

    0 0 1 0

    1 200000 0.917 $183,486.24

    2 200000 0.842 $168,336

    3 200000 0.772 $154,436.70

    4 200000 0.708 $141,685.04

    5 200000 0.65 $129,986.28

    Hence,

    The business worth today is

    = $183,486.24 + $168,336 + $154,436.70 + $141,685.04 + $129,986.28

    = $777,930.25

    Hence,

    The answer is option (b) $777,930.25
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