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 $800,000 today and annuity payments for the balance. The first payment will be for $350,000 in three months. The payments will increase at 1.9 percent per quarter and a total of 25 quarterly payments will be made. If you require an EAR of 12 percent, how much are you being offered for your company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

EAR = 12% P.a. Compounded quarterly Since the given rate is effective annual rate - Quarterly rate = [(1.12)^(1/4)]-1 = 1.028737 -1 r = 2.874% Cash flow = t=0 800000 t=1 350000 t=2 350000 x (1+.019)^1 = 356650 . . . . . . t=25 CF24 x (1+.019)^25 = 560302.6 Cash flow table= Year Cashflow PV factor @ 2.874% PV of cash flow 0 800000 1.0000 800000 1 350000 0.9721 340223 2 356650 0.9449 337003 3 363426 0.9185 333813 4 370331 0.8929 330653 5 377368 0.8679 327523 6 384538 0.8437 324423 7 391844 0.8201 321352 8 399289 0.7972 318311 9 406875 0.7749 315298 10 414606 0.7533 312313 11 422484 0.7322 309357 12 430511 0.7118 306429 13 438691 0.6919 303529 14 447026 0.6726 300656 15 455519 0.6538 297810 16 464174 0.6355 294991 17 472993 0.6178 292199 18 481980 0.6005 289433 19 491138 0.5837 286693 20 500469 0.5674 283980 21 509978 0.5516 281292 22 519668 0.5362 278629 23 529542 0.5212 275992 24 539603 0.5066 273380 25 549855 0.4925 270792 Total 8406073 Value offered = 8406073 Please provide feedback, and comment in case of any question; Thanks In advance :-)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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