Question

You own a business which generates $200,000 in profit per year. Someone has offered to buy it from you. Based on a 5 year projection and belief that you could earn 9% annually if you had the money today, how much do you believe the business is worth today?
a. $700,000.00
b. $777, 930.25
c. $440,000.00
d. $536, 522.43

Answer 1

Answer:

option (b) $777,930.25

Explanation:

Data provided in the question:

Profit per year = $200,000

Time = 5 years

Return, r = 9% = 0.09

Now,

Worth of business = ∑ (Cash flow × Present value factor)

also,

Present value factor = (1 + r )⁻ⁿ

here,

n is the year of cash flow

Thus,

Year        Cash Flows   Present value factor   Present value of cash flow

0                      0                        1                                   0

1                    200000             0.917                        $183,486.24

2                   200000             0.842                       $168,336

3                   200000             0.772                       $154,436.70

4                   200000             0.708                       $141,685.04

5                   200000             0.65                         $129,986.28

Hence,

The business worth today is

= $183,486.24  + $168,336  + $154,436.70 + $141,685.04  + $129,986.28

= $777,930.25

Hence,

The answer is option (b) $777,930.25