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 $700,000 today and annuity payments for the balance. The first payment will be for $290,000 in three months. The payments will increase at 1.2 percent per quarter and a total of 25 quarterly payments will be made.

If you require an EAR of 9 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.)

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 $700,000 today and annuity payments for the balance. The first payment will be for $290,000 in three months. The payments will increase at 1.2 percent per quarter and a total of 25 quarterly payments will be made.

Explanation / Answer

quarterly rate = 1.09^1/4 - 1 = 2.1778%

Present value of a growing annuity = 290,000/(0.021778 - 0.012)* (1 - (1.012/1.021778)25)

Present value of a growing annuity = 6,337,421.24

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