Question

Show Excel, please

Suppose you are trying to decide whether to purchase a business. You expect that you will be able to collect $4,000,000 in revenue in year 1 and you expect your revenues to increase by 6% each year though year 10. Your costs in year 1 are expected to be $2,400,000 but you expect them to increase by 3% each year thereafter. You believe that you will be able to sell the business after 10 for %24,000,000 at the end of year 10. If the rate of return on similar business is 20%, calculate the most you should be willing to pay for the business. Suppose the people who currently own the business are asking $16,000,000 for the business. Are you willing to pay this price?

Answer 1

Year	Revenues	Costs	Net Income	Present value factor	Present value
1	4,000,000.00	2,400,000.00	1,600,000.00	0.833333333	1,333,333.33
2	4,240,000.00	2,472,000.00	1,768,000.00	0.694444444	1,227,777.78
3	4,494,400.00	2,546,160.00	1,948,240.00	0.578703704	1,127,453.70
4	4,764,064.00	2,622,544.80	2,141,519.20	0.482253086	1,032,754.24
5	5,049,907.84	2,701,221.14	2,348,686.70	0.401877572	943,884.51
6	5,352,902.31	2,782,257.78	2,570,644.53	0.334897977	860,903.65
7	5,674,076.45	2,865,725.51	2,808,350.94	0.279081647	783,759.21
8	6,014,521.04	2,951,697.28	3,062,823.76	0.232568039	712,314.92
9	6,375,392.30	3,040,248.20	3,335,144.10	0.193806699	646,373.27
10	6,757,915.84	3,131,455.64	3,626,460.19	0.161505583	585,693.57
10	Selling price		24,000,000.00	0.161505583	3,876,133.99
				Maximum Price	13,130,382.17
Since the price asked is higher, it should not be paid