You have successfully started and operated a company for the past 10 years. You

Question

You have successfully started and operated a company for the past 10 years. You have decided that it is time to sell your company and spend time on the beaches of Hawaii. A potential buyer is interested in your company, but he does not have the necessary capital to pay you a lump sum. Instead, he has offered $500,000 today and annuity payments for the balance. The first payment will be for $220,000 in three months. The payments will increase at 1.9 percent per quarter and a total of 20 quarterly payments will be made.

If you require an EAR of 8 percent, how much are you being offered for your company? Show how to calculate with financial calculator

You have successfully started and operated a company for the past 10 years. You have decided that it is time to sell your company and spend time on the beaches of Hawaii. A potential buyer is interested in your company, but he does not have the necessary capital to pay you a lump sum. Instead, he has offered $500,000 today and annuity payments for the balance. The first payment will be for $220,000 in three months. The payments will increase at 1.9 percent per quarter and a total of 20 quarterly payments will be made.

Explanation / Answer

Using financial calculator:
PMT=220000/1.019=215897.94
N=20
I/Y=1/((1+1.9%)/((1+8%)^(3/12)))-1=0.0419%
FV=0
CPT PV=4299038.466

Total value=4299038.466+500000=4799038.466

Using excel:
=500000-PV(1/((1+1.9%)/((1+8%)^(3/12)))-1,20,220000/1.019)
=4799038.466

Using formula:
=500000+220000/((1+8%)^(3/12))+220000*(1+1.9%)/((1+8%)^(6/12)).....
=500000+220000/((1+8%)^(3/12))*(1-((1+1.9%)/((1+8%)^(3/12)))^20)/(1-((1+1.9%)/((1+8%)^(3/12))))
=4799038.466

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.