Question

You are an intern at a leading investment bank. Your manager assigned you a project to value a startup coffee shop, McAffee.

McAffee owns 5 coffee machines for which it paid $5,000 each. It owned furniture that it purchased for $10,000. There is no cash or liquid asset on the balance sheet. The coffee machines and the furniture have just been bought and have zero depreciation. The owners of McAffee borrowed $15,000 to help finance these investments. They contributed the rest from their own money. The bank charges 10% interest rate on the loan and it requires McAffee to pay $5,000 of principal per year in addition to the interest payments.

The annual rent is $10,000, the salary of the staff is $20,000. The cost of raw material such as coffee beans, milk and sugar is $12,000 per year.

Looking at the income statement, you find that the annual sales are $70,000. You project that the sales will grow at increments of $5,000 per year until they reach $90,000. This increase comes purely from price increases so there is no corresponding increase in any of the expenses. All future years’ sales income are assumed to be stable, at $ƒ90,000 annually.

The discount rate is 10%.

What is the book value of the assets?

Answer 1

The book value assets = Total Assets of the business

In the given question McAffee have only 2 assets that is set of 5 machines and a furniture.

So the total value of these assets is the book value of assets of the business.

Value of the assets are as followed :

• 5 machine of $5000 = $25000 ( $5000 * 5)
• Furniture = $10000

Total value of assets of the business is $35000 ( $25000 + $10000).

Our answer is book value assets of McAffee is $35000.

Regards