You have just inherited $1,000,000 and are considering a number of investment options. Among the investment...

You have just inherited $1,000,000 and are considering a number of investment options. Among the investment projects offered you there is a service/gas station whose present owner is asking exactly $1,000,000 for it. The information he has provided you indicates that the sales and the expenses of the station have been relatively stable for the past 10 years. In fact, the present owner claims that he is so confident about the performance of the station that he is willing to provide the buyer with a money-back guarantee after three years. That is, after three years, if the buyer is not satisfied, he would buy the station back from him/her at exactly the same price. Based on the information given to you, you have estimated the annual costs and revenues of the station for the next three years as follows:

Periods	Revenue	Cost
Year 1	$700,000	$570,000
Year 2	$740,000	$600,000
Year 3	$800,000	$620,000

Assuming a risk-adjusted 6 percent discount (interest) rate, what price would you put on this service station? Would you buy it at the asking price? Explain.

Note: This is present-value valuation problem.

Expert Solution

Rahul Sunny answered 2 years ago

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