Question

You want to start a business that you believe can produce cash flows of $44,000, $61,000, and $80,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $200,000. At a discount rate of 9.7 percent, what is this business worth today

Answer 1

The present worth of this business it has been calculated is given as $302,898.

How to solve for the worth of the business

In the first year

Cash flow = 44000

PVF at 9.7% = 0.91158

The present value = 0.91158 * 44000

= $40106

In the second year

Cash flow =  $61,000,

PVF at 9.7%  = 0.83097

The present value = $50689.17

In the third year

Cash flow = $80,000

PVF at 9.7% = 0.7575

The present value = $60600

In the 4th year

Cash flow = $200,000

PVF at 9.7% = 0.7575

The present value = $151,500

The worth of the business today is going to be the sum of all the present values

=  $151,500 + $60600 +  $40106.52 + $50689.17

= $302,898

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