Question

You want to start your own consulting business and believe it could produce cash flows of $5,600, $48,200, and $125,000 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 $450,000. At a 14 percent discount rate, what is this business idea worth today

Answer 1

Answer:

This business idea worth $430,127 today

Explanation:

Today value of the future cash flows can be calculated by discounting the cash flows on the given discount rate. It is called the present value and sum of present value of all cash flows is called Net present value.

We use following format to calculate NPV for the given business idea

Years                                     1                  2                  3

Cash Flows                      $5,600       $48,200      $125,000

Sale Proceeds                                                         $450,000

Net Cash Flows               $5,600       $48,200      $575,000

Discount Factor    14%    0.8772        0.7695        0.6750

Present values                 $4,912.32   $37,089.9    $388,125

Net present value of business idea = $4,912.32 + $37,089.9 + $388,125

NPV = 430,127.22