Question

3. I can buy a business that promises a $15,500 cash flow every year for the next 6 years.

How much should I pay to acquire this business if I require a 14% rate of return?

1. A $50,274.35

2. B $60.000.87

3. C $60,274.35

4. D $60,766.87

5. E None of the above

8 If you purchased the above business for $55,000, then your NPV is... and you ...value

1. A $5,274.35; destroyed

2. B -$9,533.13; created

3. C $666.87.13; created

4. D $766.87.23; created

5. E None of the above

Answer 1

1 ) Correct answer is C $ 60,274.5.

2 ) Correct Answer is E i.e None of the Above becasue if you purchase the business for $55,000 the NPV is $ 5,274.35 and you Created Value.

Working

Year	Cash Flows (In $'s)	Present Value Factor @14%	Present Value
1	15,500.00	0.8771	13,596.49
2	15,500.00	0.7694	11,926.75
3	15,500.00	0.6750	10,462.06
4	15,500.00	0.5921	9,177.24
5	15,500.00	0.5194	8,050.21
6	15,500.00	0.4556	7,061.59
Present Value of Cash Flows	60,274.35

If you Purchased the business for $55,000 then

Present value of the business = $60,274.35

Less: Purchase Price    = $55,000

Net Present Value(60,274.35-55,000) = $ 5,274.35