Question

(**Please show work**)

You must price a small business that is expected to produce $25,000 in annual CFs (starting next year) and grows at 6% per annum for 15 years. The business sunsets after year 15. What is the maximum amount you would pay for the business (today) if the discount rate is 8.75%?

Answer 1

The correct answer is $ 289,997.32

Note:

1.Cash Flow in Year 1 = $ 25,000

Cash Flow in Year 2 = Cash Flow in Year 1 * (1+ Growth Rate)

Cash Flow in Year 3 = Cash Flow in Year 2 * (1+ Growth Rate) and so on for every year

2.

Year	Cash Flow	Discount Rate (8.75%)	Present Value ( Cash Flow * Discount Rate)
1	25,000	0.91954023	22,988.51
2	26,500	0.845554234	22,407.19
3	28,090	0.777521135	21,840.57
4	29,775.40000	0.714961963	21,288.28
5	31,561.92400	0.657436288	20,749.95
6	33,455.63944	0.604539115	20,225.24
7	35,462.97781	0.555898037	19,713.80
8	37,590.75647	0.511170609	19,215.29
9	39,846.20186	0.470041939	18,729.39
10	42,236.97398	0.432222473	18,255.77
11	44,771.19241	0.397445952	17,794.13
12	47,457.46396	0.365467542	17,344.16
13	50,304.91180	0.336062108	16,905.57
14	53,323.20650	0.309022628	16,478.08
15	56,522.59889	0.284158738	16,061.39
			2,89,997.32