In: Accounting
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.
Take for example the below figures:
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