Question

Data analytics have big attention from our industry in the current days. As a recent graduate, you would
like to adventure in the creation of a new company in this area. To set up the company you will need to
invest about $500,000 at the beginning (time 0). The yearly operating cost and salaries of the company
are about $400,000 per year and it is expected to be constant. The projected incomes are about
$300,000 for the first year increasing about 30% every year. With this information answer the following
question:
1. Draw the cash flow diagram for this project? (10 points).
2. If you would like to have a rate of return of 25% in 6 years, how much you should sell the
company after six years of operation? (15 points)

Answer 1

Present worth of geometric series = A * [1 - (1+g)^n / (1+i)^n] / (i - g)

Present worth of income = 300000 * [1 - (1+0.3)^6 / (1+0.25)^6] / (0.25 - 0.3)

= 300000 * [1 - (1.3)^6 / (1.25)^6] / (-0.05)

= 300000 * 5.306380

= 1591914.11

Let sale price after 6 yrs be S, then NPW of project should be 0 at 25%, therefore

-500000 - 400000 * (P/A, 25%,6) + 1591914.11 + S *(P/F, 25%,6) = 0

S * 0.262144 = 500000 + 400000 * 2.951424 - 1591914.11

S * 0.262144 = 88655.49

S = 88655.49 / 0.262144 = 338193.85 ~ 338194 (Nearest Dollar)

CFD