Assume you have developed a business over the past 20 years. You want to determine its...

Assume you have developed a business over the past 20 years. You want to determine its worth if you sell it. The value of the property is $2 million and is paid off (no debt). Over the next 10 years, you expect to sell $200,000 worth of widgets per year, increasing at $20,000 worth of widgets each year. Your costs are $120,000 per year, increasing at $10,000 per year. However, at year 5 you must spend $2,000,000 to upgrade equipment to keep up with production. Your costs thereafter are $150,000 per year. What is the present value of the business (i.e. total cost if sole today) assuming an interest rate of 4%/year).

Expert Solution

					1.04
Year	Cash Out Flow	Sales	Operating Cost	Net Inflow	PVF @4%	Present Value
0	2,000,000.00	-	-	(2,000,000.00)	1.000	(2,000,000.000)
1		200,000.00	120,000.00	80,000.00	0.9615	76,923.077
2		220,000.00	130,000.00	90,000.00	0.9246	83,210.059
3		240,000.00	140,000.00	100,000.00	0.8890	88,899.636
4		260,000.00	150,000.00	110,000.00	0.8548	94,028.461
5	2,000,000.00	280,000.00	160,000.00	(1,880,000.00)	0.8219	(1,545,222.961)
6		300,000.00	150,000.00	150,000.00	0.7903	118,547.179
7		320,000.00	160,000.00	160,000.00	0.7599	121,586.850
8		340,000.00	170,000.00	170,000.00	0.7307	124,217.335
9		360,000.00	180,000.00	180,000.00	0.7026	126,465.612
10		380,000.00	190,000.00	190,000.00	0.6756	128,357.192
						(2,582,987.559)

Present Value of Business is negative $2,582,987. Cash inflows are not sufficient to cover the Capital Investments of business.

Note 1: Even after 5th year, cost has been increased $10,000 each year.

Note 2: Opening Value of property has been considered for calculation of NPV.

ekkarill92 answered 2 years ago

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