Question

In: Accounting

you are to find a business for sale, project the cash flows, and calculate the NPV...

you are to find a business for sale, project the cash flows, and calculate the NPV to determine whether the business is worth buying based on NPV and your overall evaluation. You may wish to visit a business broker website as they list businesses for sale, usually provide latest year cash flow and the price of the business. You need to:

1. Qualitatively assess the business. Why is it viable in the long run? If it’s not then choose another business as why would you perform a valuation and evaluation of a business you thought was not viable?

2. Predict cash flows based on your assessment of the business, changes you would make if any and how they affect CF's. You can also choose a growth rate to predict CF's but you have to justify the choice of g.

3. Choose a discount rate (k).

4. Calculate PV, NPV and IRR.

5. Make a recommendation on the business decision.  

Solutions

Expert Solution

Take for example the below figures:

  • Cost of Capital - 12%
  • Initial Cost of Project - $425,000
  • Cash Inflows Year 0 1 2 3 4 5
  • Cash Flow $495,000.00 $495,000.00 $495,000.00 $495,000.00 $495,000.00
  • Cash Outflow
    Year 0 1 2 3 4

    5

  • $310,000.00 $310,000.00 $310,000.00 $310,000.00 $310,000.00
Cost of Capital 12.00%
Initial cost of project $425,000.00
Cash Inflows Year 0 1 2 3 4 5
Cash Flow $495,000.00 $495,000.00 $495,000.00 $495,000.00 $495,000.00
PV of Cash Flow $441,964 $394,611 $352,331 $314,581 $280,876
Cumulative Cash Flow $441,964 $836,575 $1,188,906 $1,503,488 $1,784,364
Cost
Initial cost of project $425,000.00
Cash Outflow $310,000.00 $310,000.00 $310,000.00 $310,000.00 $310,000.00
PV of Cash Outflow $425,000.00 $276,786 $247,130 $220,652 $197,011 $175,902
Cumulative Cash Outflow $425,000.00 $701,786 $948,916 $1,169,568 $1,366,578 $1,542,481
Manual NPV Fx
NPV of Project $241,884 $241,884
IRR 33.11%
ROI 15.68%
Helper Cells for Functions:
Cash Flow -$425,000.00 $185,000.00 $185,000.00 $185,000.00 $185,000.00 $185,000.00

This project is feasible


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