Question

1. You have decided to purchase an existing business that publishes the computer magazine called Nerd. You can buy the business for $150,000. The expenses are estimated to be $125,000/year for the first 2 years and $70,000/year for the next 2 years. Revenue is expected to be S125,000 per year. You estimate that you can sell the business at the end of 4 years for the original purchase price. You want to earn at least 11% per year on your investment. All expenses are assumed to occur at the beginning of the year and all revenue at the end of the year. (a) What is the payback period for this investment? [3 marks] (b) What is the IRR? Should you invest? (5 marks) (c) What is the NPV? Should you invest? [2 marks] (d) Your accountant tells you that you could sell your business for more than you estimated at the end of 4 years. What is the minimum selling price you need to make this investment worthwhile? [4 marks]

Answer 1

Cite ta Initial Investment $ 150,000 Yeal revenue Expenses Net Cash Inflore 125.000 125 900 125000 125.000 125.000 125,000 70,000 70,000 55,000 ssovo 110,000 Pay Back posiada Gyears + 150,000 - 110,000 Yyout 0.7 1977 yes, previous Calculation in (6) from the sum Nol (a) Years cash flows - 15o, ooo calculation - 150,000 - 55.000 55000 SS OY Trio hos = 4.322 55,000 , TV 55000 =37565 (71,113) since es not in the the IRRis negative, the investment profrakle so we should not invest pooject

classmate Date Page in sum A from Calculation G the previous I la) Years Net Cash flows NPV -150,000 -150 000 55,000 = 40215 55.000 55000 55,ooo - 73,55 Since NPV is negative not profitable. Hence invest in this project the investment we should not

classmate Date Page @ Minimum Selling Price = 150,000 + (1 x 150,000) x 4. = 150,000+ 66,000 = $ 216,000