In the following problem, you will need to use discounted cash flow techniques t
ID: 2634680 • Letter: I
Question
In the following problem, you will need to use discounted cash flow techniques that you learned to figure out a value for the business.Here are the assumptions:
The final year net income will be used as a cash flow since the owners are using it this way and it will increase 3% per year with inflation
Improvement estimates will be subtracted in the year they are made from this cash flow to come up with net cash flows (Equipment, Remodel, Roof, Inventory, Initial Cash, Parking Lot)
Loan payments will be used with the following terms
10 year term, annual interest at 8%, principal 200,000
The discount rate will be 12% (The approximate rate you could earn if you invested your money in the stock market)
After 10 years, the business will be sold for $250,000
Fill in the last three rows of the table to find the value of the business using this technique (Remember
Explanation / Answer
Year 0 1 2 3 4 5 6 7 8 9 10 Net Income 67000 70350 73867.5 77560.88 81438.92 85510.86 89786.41 94275.73 98989.51 103938.986 Equipment -31500 Remodel -25000 New Roof -15000 Inventory -5000 Cash -5000 Parking Lot -10000 Loan Pmt. -29805.9 -29805.9 -29805.9 -29805.9 -29805.9 -29805.9 -29805.9 -29805.9 -29805.9 -29805.9 Sale 250000 Net Cash Flow (Add Up Columns) 2194.10 9044.10 29061.60 37754.98 51633.02 55704.96 59980.51 64469.83 69183.61 324133.09 PV @ 12% (Divide each NCF by (1+i)n) 1959.02 7209.90 20685.47 23993.97 29297.96 28221.87 27132.14 26038.28 24948.30 104362.18 Add up PV's to find max price you would pay 293849.09 You pay= 225000 NPV= 68849.1 You pay= 300000 NPV= -6150.9
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