Question

You are considering a business that will return $22,000 at the end of each year for 15 years. In Year 7 you would pay a one‐time fee of $45,000, and in Year 15 you would sell the business for $85,000.   

a) Draw the cash flow diagram for this problem.

b) For an interest rate of 5.5%, how much should you pay for the business today?  (You may use the “NPV” function in MS Excel.) Please show excel

Answer 1

				5.50%
				NPV@ 0.055
Year	Inflow	Outflow	Net cash flow	PV factor	PV-Cash flow
1			-	0.948	-
2	22,000		22,000	0.898	19,765.95
3	22,000		22,000	0.852	18,735.50
4	22,000		22,000	0.807	17,758.77
5	22,000		22,000	0.765	16,832.96
6	22,000		22,000	0.725	15,955.41
7	22,000	(45,000)	(23,000)	0.687	(15,811.05)
8	22,000		22,000	0.652	14,335.18
9	22,000		22,000	0.618	13,587.84
10	22,000		22,000	0.585	12,879.47
11	22,000		22,000	0.555	12,208.03
12	22,000		22,000	0.526	11,571.59
13	22,000		22,000	0.499	10,968.33
14	22,000		22,000	0.473	10,396.53
15	22,000		22,000	0.448	9,854.53
15	85,000		85,000	0.448	38,074.31
				NPV	207,113.35
				NPV	207,113.35
NPV is the amount which can be paid for the business